HUGE GAMBLE – WHERE’S THE PEDIGREE

1. Today the government is making the biggest commitment on the part of the taxpayer that has ever been made. It intends to pay €54,000m to purchase developers’ loans from the banks. This is the equivalent of a €34,000 additional mortgage for every family in the country.

It is happening not because of some international tsunami that has engulfed our economy. No. It is happening because of catastrophic policy failures, the refusal to heed warnings and the free hand that was given to easy money in a runaway property bubble.

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.

It is happening at a time when funding is being slashed
 For investment in vital infrastructures
 For critical care for the extremely sick
 For special need support for children with a disability.

We can be under no illusions, if we get this wrong, it has the capacity to greatly prolong recession and the haemorrhaging of jobs.

The Minister is purchasing these loans at a 30% discount from their face value. This is a far cry from the 50% discount that spokespersons from the Green Party said was the minimum acceptable.

The Minister asserts that the market value of the security underpinning these loans is €47 billion. This assertion is made without any underpinning. We were promised details distinguishing loans secured on greenfield sites with no zoning, across a spectrum to fully completed properties with tenants in place. He has not honoured that commitment. The evidence offered that the market has now bottomed out is of a very dubious nature. Abnormally high yields from renting is cited as evidence that property prices will bounce back. However, many would interpret it as evidence of abnormally high rents, kept up artificially by ‘upward-only rent revisions’.

Even if we suspend our disbelief on the estimate of today’s value, the taxpayer still has to swallow the Minister’s decision to pay €7,000m more than that for these impaired loans. The taxpayer is being asked to pay ‘hope value’ that no one else in the market place is willing to contemplate. We are not given any clue as to how the Minister has come up with this number. We are expected to accept it on faith.

In recent weeks the Greens have confidently asserted that under NAMA the risk would be shared 50/50 with the banks. However, the decision to pay no more than 5% of the payment in subordinated bonds destroys that assertion. This risk-sharing is neither of the scale nor of the sort recommended by Professor Patrick Honohan, now Governor of the Central Bank. His model produced entirely cleansed banks with a substantially higher shareholding for the taxpayer, while the shareholders and bondholders in the banks were to be given a shareholding in NAMA. The model had a logical underpinning. The present approach does not.

The Minister asserts that all of the operating costs of NAMA will be covered by payments still being made on the 40% of these loans. No analysis of any sort is presented to back this up. We are not told the amount of revenue coming in from this source nor are the costs of NAMA itemised in any way. It is difficult to believe that these loans will generate the €1-€1.5 billion needed to cover costs when the Minister tells us that they have accumulated €9 billion in rolled up interest since they were first made!

Another bold assertion by the Minister is that it would only take a 10% recovery in property prices over the next ten years for NAMA to break even. This is presumably based on his belief that revenue from the performing element of this loan book will continue to cover all of NAMA’s operating costs. Just how credible is this contention?

 The ECB rate is now 1%, but the forecast for its average value over the next ten years is 3.8%, nearly four times the present cost.
 Rents which are the revenue base for these earnings are continuing to fall.
 The rate of impairment within the loan book is likely to rise as businesses continue to close their doors and borrowers give up hope that they can retrieve any of their equity.
 Growing impairment will bring with it rising operating costs for NAMA as the cost of litigation, receivership and liquidation mount.

Not only is this a big gamble which a taxpayer is being asked to make on the dubious animal which is NAMA, but information about the animal’s pedigree, its track record and its handicap is being wilfully concealed.

THE ONLY ALTERNATIVE?

2. One thing that Irish people have learnt from the past seven years is not to accept glib assurances from Ministers that everything will turn out all right. Many of those who are telling us that NAMA is the only alternative, are the same people who up to relatively recently were assuring us that the property bubble was founded on ‘sound economic fundamentals’ and that there would be a ‘soft landing’. They have found a new creed in ‘long-term economic value’ but the message is the same. For them, the dream lives on. A bounce back is inevitable. Suspend your critical faculties and accept our word.

There are too many casualties, too many lives ruined to accept NAMA on faith.

There are those who say that at a time when Ireland is in crisis, the opposition should put on the green shirt and support the government proposals, right or wrong. This is a view that I totally reject. Our history is strewn with instances where Irish people paid dearly because timely questions were not asked, or if asked were not answered.

Some add an argument of political opportunism – a way for the opposition to avoid hard decisions. Patriotism and opportunism are uneasy bed fellows. I believe that the patriotic thing is to ask the questions that the government, whatever government, would prefer to be left unanswered.

This is a huge decision and we must do everything in our power to get it right. It has engendered an unprecedented level of debate. This is not something to be scared of. It is something to welcome. In their wisdom the authors of our procedures arranged for five stages of debate in this House. This is no accident. It allows the House to first decide on the principle of a bill and then, if that principle is accepted, move on to amend the detailed provisions. This is as it should be. During the debate on the principles of a bill, you can and must consider alternatives.

WHAT PROBLEM ARE WE TRYING TO SOLVE

3. Much has been written about the banking crisis which we confront. In framing a policy response, we must decide what is the problem that we are seeking to solve. It is not to bail out the banks. Nor is it to bail out the developers. It is to sustain a financial system that can support enterprises and families in their daily business, and protect the opportunity for jobs. At times the government has lost sight of this important distinction. It is the distinction which economists make between the parts of the banking system which are ‘systemically important’, and require ultimate protection by the taxpayer, and those which are not and can be allowed fend for themselves.

The principles that Fine Gael has applied in seeking a solution are to find a policy that is effective, fair and with least cost to the taxpayer. It has led us to separate the immediate task of getting credit flowing from the longer term task of a Bank Resolution Scheme.

(a) A National Recovery Bank provides a transfusion straight into the artery that carries credit to businesses and families. The model is tried and tested and can be very rapidly established with the assistance of banking expertise. It can use existing banks as agents and avoids the need to replicate the relationships between businesses and their banks developed over many years.
(b) The Bank Resolution Framework is designed to give the banks the opportunity and the incentive to work out their problems independently. The taxpayer stands ready to protect the systemically important parts of the banking system, but does not pretend that the taxpayer’s back is so broad that he or she can rescue all those who got their investments so badly wrong. The framework is one of tough love.

This approach has 5 major advantages.

 The risks and responsibilities associated with working out distressed loans remain with those professional investors who funded the loans and are best placed to recover them. The losses will be borne in the first instance by them, not the taxpayer.
 It establishes a way of accessing extra funding from the ECB and from the financial markets which goes straight to funding new lending. It does not rely on the hope that banks fighting to maintain their independence will use their scarce capital to kick-start lending in a stressed economy.
 It avoids a State-run property monopoly with the attendant dangers of sweetheart deals and the distortion of the property market. If there is one thing that we have learnt in the last twenty years, it is surely the lethal dangers of mixing political power with property ambitions.
 It creates a coherent framework not only for this crisis but for the future behaviour of banks, in which the taxpayer only protects strategically important elements of banking and demands bank investors to control their lending policies or take the consequences.
 It does not use scarce public money to nurse along impaired loans that may never recover their value, when what we need to fund is an export-led recovery. It therefore avoids any requirement to value impaired loans, where the risks, even if we were using a market value test, are enormous, or to insist on crystallising all losses immediately.

NAMA FAILS CRITICAL TESTS

4. NAMA simply does not square up to the tests of effectiveness, fairness and minimum cost. Its origins are different and are built on different principles from the Fine Gael approach.

Its origins do not start with the needs of enterprises and families. It doesn’t seek to distinguish what is important in banking from what is not. It is built on the silly notion that in order to protect our reputation, we have to stop the laws of capitalism applying to certain investors in our banks. It places an objective of keeping the banks out of national ownership on a pedestal above all other considerations, which it does not deserve.

The fundamental principles of the NAMA approach remain.

 The determination to pay hope value for the loans purchased from the banks.
 The operation of asset recovery through a politically controlled bureaucracy.
 The conduct of public business under a veil of secrecy.
 The innocent faith that banks will immediately lend.

By forcing hard-pressed taxpayers to pay too much in order to protect professional investors, it destroys the hope of fairness.

It places blind faith in the State’s ability to run asset recovery effectively when all international evidence disputes this.

Even at this eleventh hour, with the government about to commit billions of taxpayers’ money to this project, the government still has not produced a mechanism to show that all of this cost and risk can get credit flowing.

There cannot be a cost-free solution for resolving our banking crisis, but this approach seems guaranteed to maximise the cost.

WRONG ASSUMPTIONS

5. Time and again, the Minister quotes Lehmanns as the reason for this approach. However, the Minister has drawn the wrong lesson from the collapse of Lehmanns. The problem with Lehmanns was not that some professional investors faced a loss. The problem was that it was let collapse without a managed framework and spread panic all around.

Time and again, the Minister tells us that the Irish government’s capacity to borrow will be destroyed if professional investors in the banks suffer losses. This is nonsense. Investors in Irish sovereign debt have exactly the same interests as taxpayers. Their confidence will be inspired by a tough-minded government who manages its resources frugally, does not present itself as a soft touch to bail out investors who made such catastrophic mistakes.

WHERE’S THE ANALYSIS

6. The scale of the capital commitment being asked of the taxpayer today is enormous. It is over ten times even the most lavish estimate of the cost of the Metro. But where is the cost benefit evaluation for this proposal? Today’s proposal is 2,000 times bigger than the €30m threshold on which the Minister for Finance rightly insists on a thorough cost benefit analysis.

Where is the White Paper setting out the pros and cons, the risks and mitigation? This too is a standard feature of significant new policy departures. Even in areas of relatively small overall significance, where are the technical papers of any sort evaluating these proposals.

The silence is deafening from those sources from whom we would expect hard-headed analysis of the proposal. The Chief Executive of the NTMA was kept out of the loop when the proposal was being developed and has published no evaluation. The Central Bank has offered its support but provided no evaluation. The Department of Finance itself has offered nothing. The taxpayer is being asked to make this enormous commitment with nothing but an 11-page assessment by an individual consultant hired by the Minister.

I think Irish taxpayers learnt the hard way that alarm bells should ring when they see ministers making big commitments without any professional evaluation. Here where the scale is so profound and where the interests of taxpayers, of bankers, of struggling enterprises, of developers are clearly pitted against one another, we need to be particularly careful.

CONTEMPT FOR ALTERNATIVES

7. The suspicion that the professional underpinning of these proposals is thin has not been allayed by the way in which ministers have conducted the debate. There has been a carefully crafted political campaign to discredit the critics and alternative approaches while sidestepping the hard questions posed about the NAMA approach. Regal contempt has been poured on proposals like the National Recovery Bank even though such operations are up and running in other countries. The haughty display of Ministerial shock and the melodramatic letter to the Leader of Fine Gael was revealed for what it was, not just by the extraordinary press conference held before any correction could be considered by Fine Gael, but also by a similar error made by the Minister himself which he brushed off as made in the heat of the moment.

You don’t need a long memory to recall when other critics of government policy were contemptuously brushed aside, told they should commit suicide instead of talking down the carefully crafted policies of government.

Heavy reliance on vested interests and conscripts to advance the government’s arguments has served only to raise further doubts.

Disinterested evaluation of these proposals has been scarce. However, we have had some significant independent commentary.

 The ECB urged extreme caution in the use of anything but market value for the pricing of loans transferred from the banks.
 The Swedish Minister for Finance insisted that their successful model was built on entirely different principles and used only tough, hard-headed valuations, not rosy hopes for the future.
 The IMF warned of the potential pitfalls of seeking to avoid nationalisation as a guiding principle of policy, and so forcing the State to engage in very suspect valuations.
 Patrick Honohan argued for a risk-sharing model – a view shared by all of these commentators – but cogently pointed out that the mechanism used for risk-sharing cannot be one that leaves unpriceable risks on the balance sheets of the banks, but must be one directly shouldered by the investors in the banks.
 The IMF in a separate study has illustrated how politically supervised State-run asset recovery models have typically failed to maximise the recovery of money from impaired assets.

The views of these commentators are not reflected in the bill we see today. It is still based on paying hope value, on a politically-driven asset recovery, and the new risk-sharing model has very pointedly rejected the advice of the now Governor of the Central Bank.

PRECEDENTS

8. There are worrying precedents which should cause us to pause in considering this approach. In France a NAMA-type approach was adopted in respect of Credit Lyonnais. In that case the taxpayer lost 64% of the money advanced. Significantly the French government have now adopted a different approach in the present approach to bank resolution. They have, as Fine Gael has proposed, established a Joint Venture Wholesale Bank which quickly got up and running and is funding new lending to French business, accessing ECB liquidity.

It is important to be aware that international best practice has evolved since the NAMA idea was first hatched. Back then it may have been difficult to point to examples where the Fine Gael approach was adopted. Not only are there examples of recovery banks in France, Denmark and now the UK, but a bank resolution scheme that places primary responsibility for the existing banks to work through their problems themselves within a strict framework has also gained increasing support.

It is not just supported by prominent economists like Joe Stiglitz, Paul Romer, Willem Buiter, but also by hard-nosed investors like George Soros.

Those few economists who have predicted the crash and banking crisis in Ireland are also notably supporting this approach.

It is not just commentators who recognise the merits of this road, but now we have seen several examples where its principles have been applied as in Northern Rock, Washington Mutual and Bradford and Bingley. It is now international best practice that bondholders should be forced to take a hit as part of a bank resolution system. Indeed the European Commission itself instructed Anglo Irish Bank that it should cease to pay interest on subordinated bonds.

Despite this evidence, our Minister is only willing to consider bondholder losses where they voluntarily enter into such agreements. At the recent Finance Committee, he cited the recovery of share values and the value of bonds in the bank as an indication that the banks were robust and there would be no question of nationalisation. He doesn’t seem to understand that the rally in share values and the value of bonds arose directly as a response to his decision to confer a huge windfall gain on these investors by agreeing to buy their loans at a price well in excess of their market value.

In our approach to this debate, Fine Gael had been clear on the principles that we need to see enshrined in a bank resolution scheme. We are not dogmatic about our model. However, in my letter of 25th August to the Minister, we have set out the areas in this Bill which conflict profoundly with our approach. These include:

 The payment of anything more than market value for the loans.
 The refusal to contemplate involuntary losses by professional investors in subordinated bonds.
 The flawed risk-sharing mechanism proposed.
 The unacceptable asset recovery process that is shrouded in secrecy and excessively politicised.
 The lack of proper oversight on behalf of the taxpayer of critical decisions and operations that will determine the cost of NAMA.
 The absence of robust mechanisms to ensure that the additional liquidity of banks will get to the businesses and households.
 The lack of a model of resolution for householders who face repossessions from mortgage lenders.

If the government wins the day on the principle of their approach, Fine Gael shall seek to remould it in a way that will protect the taxpayer from a potentially very dangerous exposure. The Bill before us deserves no support. The huge exposures have not been properly analysed.

It is a huge gamble. It can not go unchallenged.