Two years ago this February, finance minister Brian Lenihan commissioned Peter Bacon, the economics consultant, to evaluate the options for cleaning up the banks from their poisoned property loans. Lenihan got the report the following month and in early April 2009, at a press conference held at the National Treasury Management Agency, an abridged version of the Bacon report recommending the establishment of Nama was published.
The speed of decision-making to set up Nama was not – in retrospect – surprising. Confidence in the €440bn blanket banking guarantee that Lenihan and Brian Cowen had introduced in late September 2008 was already fraying. It was not fully admitted in official circles by then but markets were already starting to push government interest rates higher. International government lenders questioned how Ireland alone could unveil a banking guarantee that assumed private liabilities amounting to more than 10 times its annual tax revenues.
Most people, apart from government politicians, have by now accepted that the failure to revise in quick time the banking guarantee was a lost opportunity.
At a minimum, a review in early 2009, as Nama was being established, could have lessened the taxpayers' coverage of the private bond liabilities of some banks such as Anglo Irish.
In the abridged version of his report, Bacon warned about the increased sovereign risk ever since the guarantee had been put in place only months earlier.
But for the first time Bacon has revealed that the full unpublished report sent to Lenihan went further, and explicitly named financial institutions, including Anglo Irish, Irish Nationwide, EBS and Permanent TSB, that should have either been "wound up", merged or their rumps repackaged and sold to private investors. The aim, he said, was to limit the taxpayers' exposure to the banks.
He told the Sunday Tribune that his unedited report explicitly advised that Nama should be established along with other measures, namely ordering a review of the banking guarantee and undertaking a major restructuring of failed banks.
"It is a matter of regret that the report was not published in full because people were relying on an abridged summary in the public domain," he told this newspaper. "There appeared to be good reasons at the time in terms of market sensitivity about the information contained in the report, which I accepted."
He acknowledged that the public debate about Nama, the banks and the September guarantee would have been "more comprehensive" if his report had been published in full.
Bacon said that the recommendations he made about the wholesale restructuring of the banks two years ago are only now being implemented.
In the full and as yet unpublished report, Bacon advised that Anglo Irish, Irish Nationwide, EBS and Permanent TSB be restructured.
He said that his report recommended "the consolidation of the rump of Irish Nationwide and Anglo to be sold to the highest bidder as a business franchise, or wind down the liabilities as they mature, and possibly consolidate EBS with Permanent TSB with a strong residential mortgage franchise assuming Irish Life capitalise it". The advice was clear.
"What I was saying was that Anglo should be wound down and sold to the highest bidder and the rump of Anglo and Irish Nationwide should be put together and sold to the highest bidder. And I made some recommendations that EBS could be wrapped up. I made some suggestions along those lines. In essence it was two years on before you got your four-year plan," he said.
He said he recommended a review of the blanket guarantee and restructuring the financial institutions to advance "a credible economic strategy" to bolster the workings of Nama. He said that the review he recommended of the banking guarantee included limiting the number of institutions and some types of bonds it covered.
Asked why the government did not act on his advice, he said: "You will have to ask them that question."
Bacon acknowledged that the discount Nama paid the banks for their commercial property loans was much higher than the undisclosed estimate he made in February 2008. But he said the prediction he had made in his full report about the eventual drop in property values was accurate.
He said he based his estimate in his report to Lenihan on the amount of discount Nama would pay on information from "direct enquiries" he made to officials. It was not based on estimates by PwC or other advisers to the government, he said.
Asked if he had been mis-informed by the banks, Bacon said different loan-to-value rates were being applied by different banks. "I do not know. It may well be that what happened, and it would be interesting to know, was that a developer went in and got a 65% loan-to-value from say Bank of Ireland but that he had another loan from another institution. As far as say Bank of Ireland was concerned, it was adhering to a 65% loan-to-value ratio. That is one possibility. But in the banking system as a whole, the loan-to-value ratio was much greater."
But Bacon remains convinced that setting up Nama was essential because examining and disentangling property loan exposures was required work.
"The scale was so great that there was always going to be a significant chance that we would end up where we ended up – seeking external assistance in respect of sovereign debt – regardless," he said.
What was said in published report
Peter Bacon's warning on limiting taxpayers' exposure
On the guarantee:
"The deterioration in Ireland's credit terms associated with fiscal position has been compounded by the additional contingent liabilities of €440bn assumed by government by virtue of the necessity to guarantee the deposits of credit institutions from September last…
"Moreover, the fact that it is evident that deposits have not stabilised as a result of the guarantee is compounding the perception that the contingent liabilities could become real.
"In the event, capital markets have not grappled well with the contingent liability of €440bn created by the deposit guarantee. The tendency has been to price Irish sovereign debt unfavourably.
"There remains the risk that the market may focus solely on the headline news, pushing CDS levels wider, unless the strategic plan is explained comprehensively and clearly."
On revising the credit guarantee:
"A restructuring of the guarantee consistent with the introduction of the Nama initiative should be seen as an integral element of a comprehensive strategy. In summary, the aim should be to enhance the credibility of the guarantee by simultaneously reducing the contingent liability under it and by extending its temporal scope in relation to the sort of long-term bond issuances which are critical to ensuring the covered institutions' survival."