The economy will not recover until the troubled loans that are preventing our banks from lending money are resolved. Nama is the best solution to our problems and will get credit flowing again in a way that minimises risks to the taxpayer and to the broader economy. This approach has been used successfully to deliver orderly resolutions in many banking crises around the world.
Under EU Commission rules, Nama can't pay more for the loans than it expects to recoup from these assets over its lifetime. Nama's projections for property prices over the next decade or so will be prudent and realistic. Nama will be equally as likely to make a profit as a loss. The taxpayer will be protected in the case of a loss by mechanisms that will throw the losses back onto the banks. If Nama makes a profit, the taxpayer will get it all. Nama is designed as a "heads the taxpayer wins, tails the banks lose" solution.
Properly set up and functioning well, with transparency and sound governance, a Nama-type operation could be a key ingredient in the challenging task of getting the banking system back on its feet and re-establishing its collective nerve to provide the lending and other financial services needed to support the economic recovery. But it is vitally important to protect the taxpayer against the risk that Nama might unintentionally overpay for the assets it acquires from the participating banks. I have suggested a two-part payment scheme that could go a long way towards providing that protection. In my scheme, the banks would get bonds only for what can be confidently expected as recoverable on the loans; in addition, bank shareholders would be given an equity stake in Nama's future recoveries. Some such scheme, with the state also taking an increased percentage equity stake in the banks in accordance with capital injected, would offer better risk-sharing between taxpayers and the banks' current shareholders.
The Labour Party has been entirely consistent in its opposition to the Nama proposal since it was first mooted and we have set out a clear alternative in the form of temporary nationalisation. The party will be opposing the Nama legislation when it comes before the Dáil next month.
The Labour Party shares the concern expressed by 46 economists during the week that the inevitable outcome of Nama will be that the state will end up paying grossly over the market value for loans. Under the Labour proposal, the institutions covered by the state guarantee would be taken into public ownership for a limited period, during which time their balance sheets would be cleaned up, before being reprivatised at the earliest possible date. This would involve substantial state investment, but the amount would be far less than the Nama approach.
One of the problems with Nama is that we are all, to some extent, working in the dark. Nama is designed to undertake the most important task of any government entity, short perhaps of the establishment of the ESB. Yet opacity reigns.
In that regard, we [who oppose Nama] are forced to rely, for estimates of likely losses, on previous research, on court judgements, on bank statements and so forth. While this approach has been described as "deluded" by Dr Alan Ahearne, it indicates that falls from a peak of 60% and more are not uncommon. Combine this with a strong suspicion that loan-to-value limits of 75% were rare in commercial property, with much "equity" being in the form of guarantees on other properties and loans taken elsewhere, and we can begin to triangulate the "real" value of the assets that underlie the Nama loans.
Paying much in excess of €30bn for these loans would represent a massive transfer of wealth from public to private purses.
As if paying over the odds for impaired assets and [avoiding] public ownership at all costs weren't bad enough, we have the politics of postponement. If Nama can meet its annual debt costs through its performing loans, then we won't have to worry about the scale of the bail-out until it is wound down years hence. This short-termism is as unnerving as the potential hit to taxpayers.
The idea that banks will be suddenly transformed into agents of economic recovery is highly questionable, given the history of banking. To safeguard taxpayers' interests, promote economic development and protect employment, the banks should be corralled by public ownership, stronger regulation or both.
Because the banking and fiscal crises are now so interconnected, the rebuilding of the financial system is even more fraught. Policy-makers must now balance two risks. If they overpay for the banks' non-performing loans they will lumber taxpayers with the enormous costs of others' bad investment decisions. On the other hand, if they allow those investors to take the hit they deserve, there is a risk that those investors (broadly speaking the same ones who are lending the government hundreds of millions every week) will believe they may have to take a hit on their loans to the government. If this happened, they could stop lending. This second risk is small and difficult to quantify, but it is real: these investors now seek far higher interest on loans to the Irish government than any other in the eurozone because it is seen as so risky.
Fine Gael's concerns about the Nama arise from its potentially colossal cost for taxpayers, its doubtful impact on credit availability and the unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks.
We have offered an alternative. We would push new lending by the retail banks by setting up a national recovery bank. The banks would be given until September 2010 to repair their balance sheets by selling assets, raising more deposits and negotiating down their liabilities to long-term providers of funding. Under this solution, the responsibility for recovering distressed loans would remain with those bankers and investors that funded them.