The era of Nama-light is upon us. Only a few weeks ago the National Asset Management Agency was meant to be a horrifying sight to behold for property developers and bankers. It was meant to be a behemoth trampling all over the property market, sucking up land banks and associated collateral and making bankers very scared or even redundant, as it put thousands of loans and hundreds of borrowers through its huge, gnarled fingers.

Now the beast has been tamed by fresh government thinking – or is that fresh government flip-flopping? From Michael Somers at the National Treasury Management Agency (NTMA), to Brian Lenihan at the Department of Finance, to Richie Boucher at Bank of Ireland, the drive is to create a more modest, less vengeful, less bloodthirsty Nama.

The Nama we'll see later this year will have only modest staffing, won't be looking at smaller property-related loans and will definitely not become a huge bureaucracy, we are told. While British economist Charles Dumas of Lombard Street talks about Irish banks ending up as "shells" at the end of the Nama process, Irish institutions aren't too worried about their future size, measured by assets, but more about their size in terms of profitability and government control.

According to government documents seen by the Sunday Tribune, Nama as envisaged by Merrion Street is an altogether more puny creation than that envisioned by Dr Peter Bacon in mid-April. For government, it seems, small is the new big.

While the drive to put Nama on a diet is understandable, there may be darker motives for diluting the original Bacon plan which, while it had few defenders, was cogent, practical and unambiguous.

The new Nama is described by the government documents as "Relatively small, staffed by experts and will utilise outsourcing to a large extent, having regard to risks".

The head of the NTMA, Michael Somers, has effectively said the entire management of loans should be sub-contracted to the Irish banks or an international investment bank; Merrill Lynch has been mentioned. But the key recommendation in Peter Bacon's report advocating the setting up of Nama was that a third party should be placed between banker and borrower.

In fact the Bacon report cites breaking the link between borrower and bank as key to the success of Nama. Asset management agencies (or AMCs) do well when they break existing links between these parties, the report said.

"AMCs seem to offer tempting prospects for avoiding many of the shortcomings associated with a continuation of the existing bank-property developer relationship." The advantage of an AMC, Bacon made clear, was that such bodies are perfect for the "interposing of a disinterested third party between bankers and clients, which might break 'crony capitalist' connections that otherwise impede efficient transfers of assets from power enterprises".

While the government may argue that setting up an overarching committee within Nama is effectively the same thing, the Bacon document explicitly states that Nama must do the managing. No qualifier was entered in the Bacon document about higher-up committees. The section of the document about Nama includes the following sentence: "The functions to be carried out by a Nama would include: Management and control of the asset transferred to it". The document does mention outsourcing some expertise, but certainly does not mention the outsourcing contract going to the banks.

Breaking the link between borrower and bank is important for several reasons. One is that the banks will effectively become part of a process directed towards enforcing loan agreements on some of their own largest and longest-serving customers. Do they have the stomach to do this?

Bank executives will realise that many customers from the development sector will still be around a decade from now. In view of that, will bank executives from, say, AIB or Bank of Ireland pursue their loan agreements to the bitter end? Will they enforce their security on developers and in some cases liquidate them? The implication of Bacon's report is that they may not; hence the need for a third party to toughen their spines.

The other reason for cutting the banks out of the management function is that there will be a highly subjective element to Nama's work. For example Nama will inherit hundreds, probably thousands, of land banks and sites. Some will never be used for residential or commercial development, and others will be "worked out" eventually – in other words developed over time and producing an income stream.

Nama will decide which ones return to agricultural use and which ones get developed. The danger is the banks will have an influence over this and, based on their recent performance, this could be disastrous, with less-than-commercial projects getting the green light.

Of course Nama may not be much better at picking winners, but Bacon believed strongly that it would be better, hence his conclusions on page 6 of his document: "Nama has the potential to achieve scale and overview of developments and projects".

It's possible there is some way to merge a Nama committee and a banking committee, where both bodies agree on which projects are viable and which are not, but it certainly sounds messier than the big bank approach advocated by Bacon in his report.

A way may be found to use banking expertise, while leaving Nama to make the big calls, but Bacon's report rippled with blunt language suggesting existing bank management must be removed from the process entirely, not co-opted.

"AMCs have the potential to bring about better economic resolution of the impaired loans of Irish property developers than relying on existing bank management and banker-developer relations which have brought the problems about in the first place," Bacon stated.

The Department of Finance is now also talking about smaller loans being parked with the banks, but this is likely to cause a problem among investors. Accumulations of small development loans are as dangerous as larger concentrations ultimately, and more labour-intensive. A loan has to be managed and administered regardless of its size.

The NTMA's own document on Nama, circulated by Somers in early April, was very clear that no distinction should be made between loans on the basis of their size or whether or not they are in arrears. In a section marked "assets covered" in a document from 8 April, the document referred to which loans were to be covered: "All loans in respect of the purchase of land for development associated work in progress arrangements. In addition certain property investment loans, especially where associated with the largest borrowers".

There was no reference to smaller loans or loans not in default. In fact, at a press conference in April, Bacon said the strongest characteristic of Nama was that it would be removing all development loans from bank balance sheets, not just those in default or arrears.

As Bacon often says, it's like removing a tumour: it's best to remove all the surrounding flesh, even some that's not diseased. Of course the banks will argue that they have the expertise to manage existing borrowers and decide when loans have to be written off. They will also argue that some of the loans are complicated products that may baffle those not from a credit risk background.

But Irish development loans are not complicated financial instruments, according to Bacon's report. His summation of Irish development loans is certainly reductive. "They are loans created and secured by property assets... which are now worth significantly less than was envisaged by the loan''. Sometimes the simplest explanations are the best.

How Fine Gael is Threatening All-Powerful Bond market

Fine Gael's proposed National Recovery Bank has a lot of moving parts in comparison to Nama, and would depend on the successful completion of several fraught transactions that would be carried out in the full glare of international publicity and under the scrutiny of the markets.

While the National Recovery Bank would be funded by the state and the European Central Bank, Fine Gael also supports the idea of splitting Irish banks into good and bad banks following "stringent stress tests".

The bad banks would effectively work down their remaining loan books; they would lose their branch networks and their banking licences. But what about their creditors, the bondholders, most of whom are scattered in Europe, the US and Asia? Surely they would not be able to recover their capital advanced with a range of guarantees and security?

Well, Fine Gael's plan bravely asserts that these bondholders will simply have to taste some pain in bankruptcy proceedings. The bondholders, secured and unsecured, will either be entirely wiped out or will at least have to accept some significant haircuts on their bonds.

The Fine Gael plan suggests that will teach the bond market to invest in better banks the next time around. "Investors and funders of banks will monitor bank lending policies more closely," it says.

How the bond market is likely to react to these moves, which will be telegraphed at least a year in advance, is not clear. How the sovereign debt markets, which are currently funding the Irish state, would respond is also a big unknown.

However one senior bond dealer told this newspaper: "Their notions are naive in the extreme. Lehman has educated the world on the consequences of punishing creditors. Attempt to do likewise in Ireland and you unleash a funding crisis for Ireland Inc, not just the banks".

Fine Gael, however, last week maintained that taxpayers' interests simply must trump those of creditors.