Picture the scene. It's December 2009, two weeks after a tumultuous general election. Fine Gael finance minister Richard Bruton walks purposefully into the conference room at Government Buildings, pauses at the lectern, smiles warmly and approvingly at his junior minister Joan Burton, and reads the following brief statement to the assembled media:
"The Irish government, reflecting upon advice provided by a wide circle of experts in finance and banking, particularly those at our universities, has today decided to take all guaranteed credit institutions into public ownership with immediate effect. Trading in the shares of the following guaranteed institutions – Allied Irish Bank, Bank of Ireland and Irish Life & Permanent – has been suspended and none of these companies will now maintain a listing on the Irish stock exchange. Also being taken into public ownership is Irish Nationwide Limited and EBS Building Society, while Anglo Irish Bank has already been taken into public ownership.
"An assessor will be appointed shortly to examine whether there remains any underlying monetary value to the shares in these guaranteed credit institutions. The Irish government will now have overall responsibility for all liabilities and assets of the financial institutions hereby brought into public ownership. Negotiations with debt-holders in these banks will now begin and the government remains hopeful of a successful outcome to these discussions. A previously announced plan to set up an asset relief agency, called Nama, has now been cancelled and proposed legislation in this area has been withdrawn. The government hereby calls for restraint and calm among deposit-holders in the relevant institututions and points out that previous guaranteed arrangements for these deposits will be honoured in full. Now I am happy to take questions.''
Critics of Nama are growing increasingly confident these words may reverberate around Government Buildings before Christmas, if not sooner.
These critics were last week chalking up a victory. On Thursday the government indicated it was prepared to amend the draft Nama legislation to take on board a suggestion originally submitted by Trinity College academic Dr Patrick Honohan. This suggestion would see Nama undertaking a type of two-stage payment process when paying for loans. Nama would make an initial payment and hold back a second payment until the performance of the loan over a longer period was clear – in that way the taxpayer would have an added layer of protection.
This was interpreted last week by the eclectic mix of academics who are opposing Nama as a minor victory – effectively their media pressure had forced Lenihan to build extra protections into the legislation, this group claimed.
Lenihan, for his part, told the Sunday Tribune this was not correct. The department was only "considering" the idea of a two-stage payment, he claimed.
Those who do support Nama are also concerned that a two-part payment, rather than a full payment from the start, would fail to strip the banks of their toxic-loan exposures, thereby reducing the benefit of Nama, which is designed to lighten the amount of risk weighted assets (RWA) held on bank balance sheets. A two-stage payment would also deprive the banks of up-front liquidity and curb their ability to lend.
While last week was a good week for Nama's opponents, this disparate group have yet to table a very convincing alternative.
If Richard Bruton ever got to utter the words outlined above, they would have no impact on the primary problem the banking sector faces – the value of impaired property loans. The value of the loans will not rise or fall based on who owns the banks. The European Central Bank said in February that asset support measures should be designed to "avoid large-scale and expensive direct government ownership" ie nationalisation.
The nationalisation option does achieve a range of objectives, but none of them relate to the value of impaired loans. Nationalisation would wipe out the equity holders in the banks, but this would provide no financial benefit to the government. Nationalisation might allow the government to operate the banks with lower capital levels than normal, but again this does nothing to change the value of the loans.
The opponents of Nama have been making what they believe to be a startling assertion – that the agency will pay in excess of mark-to-market prices for the assets. In fact, this is the most banal of assertions. Paying non mark-to-market values is precisely the point of an asset-relief scheme – to give relief. Nobody ever said the agency would – in terms of overall average price – pay the mark-to-market prices.
The EU Commission, in the context of state-aid rules, considered all these issues since April and reached the following crucial conclusions.
"As a first stage, assets should be valued on the basis of their current market value, whenever possible." However, the guidance continues and effectively permits members states much wider latitude to pay higher rates, thereby giving the 'relief' effect.
The commission says: "As a second stage, the value attributed to impaired assets in the context of an asset-relief program (the 'transfer value') will inevitably be above current market prices in order to achieve the relief effect."
The commission says member states are entitled, rightly or wrongly, to look to broader time horizons to value property loan assets.
"To ensure consistency in the assessment of the compatibility of aid, the commission would consider a transfer value reflecting the underlying long-term economic value (the 'real economic value') of the assets, on the basis of underlying cash flows and broader time horizons, an acceptable benchmark."
This phrase "acceptable benchmark" opens the door to governments, at least legally, to pay long- term economic values for assets. The way the commission deals with the problem of the taxpayer being exposed as a result is to favour various clawback mechanisms at what it calls "a later stage". How long this "later stage" is going to be has yet to be answered by anyone.