From 2002 to 2008, the boards of Irish banks recklessly abandoned fundamental prudent principles, which led them directly into reckless credit creation, reckless lending and reckless imperilment of customer deposits, ending in financial meltdown in September 2008.
The minister for finance is now – patronisingly and misleadingly – trying to convince us that it would be good for us, the taxpayers, to become liable for a new Titanic – that is, Nama, thought up and designed by a close and preferred adviser to the government, Peter Bacon.
The minister and his advisers are trying to pied-piper us into this costly, uncharted Nama project for which we, the taxpayer, will be fully exposed to certain losses of not less than €11bn.
The minister and his advisers want Nama to buy €77bn of bad loans from the banks for €54bn, notwithstanding that, at very best, only €43bn will be recovered from those loans. In fact, it is much more probable that the loan recoveries will be only €36bn. In summary, then, Nama will definitely lose €11bn and much more likely about €18bn.
Let's set some facts out:
• You can't recover more than 100% on a loan.
• Current recovery rates are 25%. (We see this in Zoe and now Fleming and also in the Irish Glass Bottle site.)
• All loans currently performing stay performing.
• In the break-even case, assuming 100% recovery on the performing loans (a highly optimistic assumption), then the recovery rate for non-performing loans has got to improve (and this is highly improbable) from the current 25% to 50%.
•This also implies that Nama needs the prices of underlying assets to go up by 100% (9% a year, compound, every year for nine years, not simply a 10% uplift over 10 years).
Now, let's be honest about this:
• Nama's assumption that there will be 100% recovery on the €30.80bn performing loans is wishful, bordering on fanciful.
• Nama's assumption that there will be 50% recovery of €46.2bn on non-performing loans is completely fanciful.
• Requiring both these things to happen together is doubly fanciful.
• All other direct costs of setting up, managing and administering Nama, related bureaucracy, establishment costs and then further operational inefficiencies costs would be enormous.
• To overpay the banks at €54bn for bad loans doesn't make sense. One economist warned last year that "buying the assets at inflated prices would amount to a back-door recapitalisation of the banks". Best practice "is for the banks to recognise the losses on these loans up front and sell the assets at fair market value". Whose words? Dr Alan Ahearne's, now economic adviser to Brian Lenihan and one of the chief advocates for Nama. Amazing.
• To hope to levy the banks at a future date for an overpayment by Nama, and to expect the banks not to pass on the levy to their customers, is naïve.
• If Nama proceeds, further write-downs of 10% to 20% on the banks' €77bn bad loans should be charged to the banks before sale of the bad loans to Nama. This would increase the bad loan write-downs in the banks' books by a minimum of €7.7bn from €23bn to €30.7bn.
We know there's a sounder alternative. Robustly write down the bad loans; recapitalise the banks (including negotiating the write-down of bank bond-holders in appropriate proportions); bring about temporary majority ownership and control of the banks by the state via a state investment trust holding company; draw up new boards for the banks. The state investment trust holding company board could be chaired by Patrick Honohan and comprise board members of the highest calibre, integrity and competence.
Then the recapitalised banks could get on with recoveries and realisations of the written-down loans, within fire-walled divisions. This is the transparent, coherent and correct approach. That's why it will work. In addition to our own 46 economists and other experts, international commentators including the IMF, JP Morgan and Professor Joseph Stiglitz agree.
Peter Mathews is a former executive of ICC Bank, specialising in lending
Nama losses scenario
Experts agree that a Nama outcome with highest reasonable probability is 65% recoveries on performing loans and 35% recoveries on non-performing loans. That reasonably forecasts the losses on Nama loans recoveries as follows:
Purchase price of the €77bn of Nama loans: €54bn
Recoveries on performing loans (65% x €30.8bn): €20.02bn
Recoveries on non-performing loans (35% x €46.2bn): €16.17bn
Total Nama loan recoveries: €36.19bn
Total losses on Nama loan recoveries: €17.81bn
The above implies an additional write-down requirement of 23% on €77bn