24 April, 2009

This NAMA business

The Tree of Gold or Crann an Óir sculpted by Eamon O'Doherty in 1991 stands outside the Central Bank's Headquarter Building on Dame Street in Dublin. The bronze tree (not gold) is overshadowed by a curious piece of granite clad concrete that overshadows its leaves. Perhaps it's an appropriate metaphor for the way that construction and speculation took over during the boom years. Indeed the building itself designed by the late high-flying architect Sam Stephenson was built some 10 metres higher than the the drawings submitted in its planning permission, a fact only noticed apparantly when the city planning officer looked out from his office which was then just across Fownes Street, and scratched his head at the mismatch between the plans and the building.

The Irish Green Party's Housing Policy, adopted in 2004 pointed out that
"land speculation and the hoarding of zoned land have distorted the housing market and impeded the provision of affordable housing" and stated that the Government needed to "progressively limit the amount of money that lending institutions can lend for house purchase in order to reduce the price of housing." Back then we were in opposition, now we're in Government. We didn't cause the problem, but we are working hard to clean up the mess and get 'Ireland Inc.' back onto an even keel.

The National Assets Management Agency (NAMA) will be used to consolidate and stabilise our banking and property sector. It will be the largest property owner and developer in the State. It is crucial that the regulation and overview of NAMA is free from undue political interference, once it is up and running. I'm glad to see a health debate emerging about the foundation of NAMA. A glance at the Irish Times Opinion piece 'Nationalising banks is the best option' last Friday might make you feel that an incorrect decision has been made, but I'm not convinced. Twenty economists put their names to the piece, and the line-up included many of the heavy-hitters from the UCD Economics Department. As a a piece of rough and ready research I went over to the excellent IrishEconomy website and checked to see how many of their contributors had signed the piece. Only 5 of the 29 had put their names to the irish Times piece. Of course its highly likely that many of them weren't asked to, but still, it wasn't quite a flood.

Nationalisation would still appear to require the same amount of capital as NAMA, so I don't feel it jumps off the page as neat solution. I'd also be a little bit wary of the Department of Finance being put in charge of six major banks. In addition, there's also advantages to allowing some semblance of a real, rather than a full state market to operate in the price of land. There are strong arguments being made in the middle of this economic storm for more and more state intervention and control, but unless this is done at arms' length from the Oireachtas, it will be open to charges of political control.

One of the crucial and positive steps that must be taken, though is to remove the hope value of land that seems almost ingrained in the Irish psyche. That may be happening anyway, to judge from a piece of land a few miles out the road from Sligo that sold for six million a few years ago, and that more recently changed hands for €500,000. However a colleague pointed out that in Catalonia, they have mapped and zoned (in a good way) that entire region of Spain, so that developers know what the development potential is of every patch of land before it is sold. That clearly leads to better planning decisions, more certainty, and more buy-in from local communities. There's still far too many County Managers here in Ireland granting permission for rural business parks, and having their decisions overturned by An Bord Pleanála.

NAMA will have to maximise the value of its loan book and the underlying assets in the interests of the State and tax payer. I'm hoping that transparency and smart planning might allow us to look beyond a very narrow fiscal definition of maximising, and ensure that the best use is made of all assets. That could mean converting a hotel close to a hospital into step down beds, or producing a proper planning scheme for lands adjacent to a railway line before it opens so as to maximise value and sustainability, rather than selling off the four green fields for face value. For starters they'll need to prioritise sites for development according to the National Spatial Strategy.

Things are moving fast though. NAMA has a website, and they seem to be hiring from what I can see on their home page.


Ciaran Daly said...

Very interesting post, it's a pity we're not having a real debate on this crucial issue.

I think that the 20 Irish economists that signed the letter were those with a banking (or finance) specialism, and that other economists on irisheconomy.ie may not have signed because their specialisms were in other areas. I suspect many others agree although not all.

In what other area of life would you put money into an insolvent business and get no ownership stake? It makes no sense. I'm not a fan of nationalisation at all but this is crazy. The only reason the banks shares have any value at all is because of the government guarantee, they are worthless. Temporary nationalisation for the big 2 & orderly winding down of the others would make a lot more sense.

Temporary nationalisation (or pre-privatisation) can & should be done at arms length from government, otherwise there will be a revolution.

Why is NAMA taking the good as well as the bad property loans?

tomcosgrave said...

One of the crucial and positive steps that must be taken, though is to remove the hope value of land that seems almost ingrained in the Irish psyche.
Good luck with that agenda in a Fianna Fáil government, Ciarán! Fianna Fáil are beholden to people who want the hope value of land to not only be maintained, but increased. Fianna Fáil are riddled and rotten to the core. You can do nothing to change them.

I also have some questions for you, if you don't mind...

How much of the NAMA controlled property is overseas?

Why has NAMA taken charge of holes in the ground such as the Chicago Spire?

How much if the NAMA controlled
property is Irish?

Why was NAMA not limited to properties in Ireland?

What is the current relationship between Peter Bacon, the architect of NAMA and Ballymore Homes, where he was formerly a member of the board?

Ciaran - if you stay on in this Government, you will probably not be returned to Dáil Éireann after the next General Election and the same can probably be said for most of your party colleagues. Do you have any idea of the sheer fury that is out there? Get out while you can and you have a chance of being returned.

James Conran said...

Interesting to hear your thoughts Ciaran. You say that "Nationalisation would still appear to require the same amount of capital as NAMA..." but this is wrong. Look at it this way:

1) It seems overwhelmingly likely that the real value of the banks' assets is less than their liabilities, or at least not sufficiently bigger than liabilities to leave them with sufficient capital (capital = surplus of assets over liabilites).

2) If NAMA pays the correct price for the assets this won't address the whole on the banks' balance sheets.

3) So if nationalisation is ruled out NAMA can only work if it overpays for the assets - the amount of the overpayment would represent a backhanded recapitalisation with no shares ("upside") in exchange.

Let's say the banks need €20 billion. If we nationalise and recapitalise, the cost of fixing the banks will be: €20bn less whatever we get by selling them back to the private sector. If we recapitalise via NAMA overpaying by €20bn, the cost will be €20bn less nothing, with the "upside" owned by shareholders rather than the state.

So it's wrong to say that NAMA without nationalisation costs as much as NAMA with nationalisation.


James Conran said...

Oh I wanted to ask Tom Cosgrave why exactly it matters what the dodgy loans were spent on by the borrowers? What does it matter whether the properties are in Bulgaria etc.?

David Madden. said...

For what its worth, I am one of those economists on the Irish Economy site who was not asked to sign. Presumably this is because banking/finance is not my area of specialisation. But if I had been asked, I would have signed. I find the arguments in that letter more persuasive than the arguments which have come out from the Government against nationalisation.

Ciarán said...

Ciaran Daly, Thanks for your comments.

Yup, as David points out later on, at least one (and probably more) of the Irish Econonomy bloggers wasn't asked.

The NAMA FAQ sheets says, and I quote:
"NAMA will actively manage its loan portfolio over a period of years to ensure that the optimal value for money is obtained for the taxpayer and like a commercial entity it will want all loan agreements to be honoured in full. Where write downs are taken, this will reflect commercial reality and will be offset by other loans within the NAMA portfolio which do perform and may realise a greater value than the cost of acquisition."

That seems to be a fair answer.

The main purpose of NAMA is to get credit flowing again so that businesses can create employment.

Obviously we need to move the Irish economy away from the cargo cult of over-reliance on property, and moving away from tax-incentive based develeopment will help allow that to happen.

Tom ,

One third of the assets are outside of the State, and half of these are simply north of the border in the north of Ireland.

I'd imagine holes in Chicago are probably worth more than than outlying sites in the Midlands that would be better used for grazing sheep.

Ignoring teh overseas liabilities would be a bit like not paying for the overseas calls when the bill for your mobile arrives.

Peter Bacon and Ballymore? He may well be, and thus full transparency, especially of the Register of Interests of prospective directots is important.

Sure there's anger out there, but a lot more people are saying 'keep on doing what you're doing' to me than 'go back to being a pressure group.'


The NAMA factsheet says:
"assessment of the value of the loans and the risk being transferred to the State in line with European Commission guidance and subject to appropriate terms and conditions as well as EU State aid approval."

Clearly the lawyers have been hard at work. Joking apart, a lot of the substantial discussions taking place at the moment are around this issue.


I'm assuming teh Government pays a 'real' (2009) price for the assets, and then puts in enough money to kick-start lending again (money that can be obtained on fairly decent terms internationally by Ireland), and then hopefully some of the assets rise in value over time, relaising a gain for the tax-payer in the long-run. I don't see NAMA over-paying for these loans.


Unknown said...

As one of the originators of the IT piece its exactly as Ciaran saif : we approached those that were active in the area of finance and related. Thus David Madden, for example, or Donal O'Neill (a labour market economist) were not, to take two examples, approached.
Its disingenuous therefore to say "not a flood". I suspect that if we were to take time we could have gotten 50 or 60 signatures. However, its clear that in the face of ovwewhelming academic opposition (can you name a single academic not employed by governmen who is both an expert in finance and who is against nationalisation?), against nobel laureate opposition and indeed against the IMF, the government including the GP have decided to drive on and damn the torpedoes.
The bottom line is this : its a core aspect of finance and business that those that bear the risk and put in the cash should be rewarded with ownership. Yet, in this case we are socialising the losses and privatising the gains. That is the economics of the madhouse.
Ciaran you also seem to fundementally misunderstand how banks work. NAMA cannot get credit flowing. Credit cannot increase in a banking system that is shrinking which it will do under nama/nationalisation. To argue on the one side that the banks should not be politicisied and on the other that they should be forced to disgorge extra credit (create assets) when they need to shrink and deleveage is obtuse.
As for the issue of Peter B : well, he is somewhat tainted, it has to be said, by the ballymore issue and indeed I understand that he and his wife (acc to the phoenix) are also involved in their own proerty related company. Im sure that he does not let that in any way interfere with his analysis but its perceptions that matter.
Finally, as to price. Nobody knows the price of hte assets which is the fundemental problem. As we pointed out in the IT article there is no concievable haircut to the loans that will not require such recapitalisation as to make the banks nationalised.

Last ; a simple question to you Ciaran. Banks have equity and loan capital as do all companies. Capital is the buffer against losses. The equity capital is more or less gone and needs to be replenished by the state. Why should then next set of losses not be absorbed by the loan capital and only then the state come in?

Anonymous said...

Ciaran, you can see more on the NAMA arguments by the two of the Irish Times signatories here: http://trueeconomics.blogspot.com/2009/04/whats-wrong-with-nama.html

Dreaded_Estate said...

Thank you for posting your views on NAMA Ciaran.
But I think the government and the Greens are making a fatal mistake for the country in not nationalizing the banks.

I agree that the banks must be cleaned up but the current approach is not the best way of doing it for taxpayer.

One of the major risks with NAMA is mis-pricing the banks assets/loans. If the assets are mispriced it is a transfer of wealth from taxpayers to existing shareholders. If the banks were nationalized prior to transferring the assets it wouldn't matter as the shareholders would be the taxpayers.
I know there will be a levy to recoup this cost in the future but that is completely counter productive. As you have outlined removing the uncertainty from the banks balance sheets is the primary goal of NAMA. But having the threat of a levy to recoup any shortfall in the assets means you haven't really improved the balance sheets as the risk is still there just pushed out into the future.

The idea of maintaining a stock market listing is a plus but it doesn't come close to balancing out all the other negatives.

I would also like to ask you a few other questions on NAMA.

What transparency will the taxpayer get for the greatest expenditure in the history of the state?

Taxpayers deserves to know the following IMO.
-The original value of every loan
-The price paid for each loan
-The collateral for each loan
-The current value of the collateral
-Deals done with developers to reduce the repayment from the developer

The government may wish to hide behind customer confidentially but I think the public interest of a €90,000,000,000 expenditure out weight that.

Ireland's reputation has been gravely damaged by crony capitalism what better way to combat this than full and open transparency.
Give the developers 6 months in which they can refinance their loans outside the 6 Irish banks or accept the new rules.

If the laws need to be changed get them changed surely that is the role of the government.

Will the Green Party fight to have this transparency?

Stephen Douglas said...

'Securitisation' is the elephant in the room here. Why should the State step in to save those who bought an Irish developer's loan from an equally gullible Irish bank, when that loan is in default? Paul Krugman et al have shown more eloquently than I can that the 'we have to bail the banks to get them lending to business and consumers' is specious: all money poured into Irish banks immediately pours out of the country to the holders of securitised loans (even if a developer defaults on a loan the Irish bank which sold that loan on to a foreign banking entity in a securitsation deal is still legally responsible for the repayments, but the State is not) or it is hoarded (see Diamond and Rajan paper on this 'Fear of fire sales and the credit squeeze'). So what are we left with? The hope that the State in suddenly owning all these greenfield 'development sites' and rubbish hotels will do something positive with them? Well, we mess up everything; we'll mess up that. It's a forlorn hope well get it right. So instead of NAMA or as a condition of NAMA's creation what should be done?
1. We must retain the bank guarantee for all personal deposits in all Irish banks.
2. We must retain the govt bank guarantee for all inter (national and international) bank lending from September 2008 onwards.
3. We must allow (it's a free market after all; international financiers will still lend to Ireland as these are private banking entities' defaults and not sovereign defaults) banks to renege on non-performing inter bank securitisation related debts entered into between 2000 and September 2008; that is to say NAMA should not take onto its (and the State’s) books privately entered into debt contracts between our banks and other banking entities.
4. With those conditions observed formalising the current nationalisation (it has already taken place; ‘that ship has already sailed’) of our banks might take place, while minimising the impact on the State’s balance sheet. And letting those who securitised loans secured on Irish property which loans are no longer performing sing for their money.

Anonymous said...

Sorry for being off-topic and this comment isn't for publishing but would you think about signing up to boards.ie and maybe posting in this thread http://www.boards.ie/vbulletin/showthread.php?t=2055548551 as there are a lot of people who could do with a little input on what the greens are doing and have done in government, there's seems to be lot of the usual stuff about you being sell outs and driving your cars in to work.

This isn't the first thread about the greens and its always the same stuff that comes up in them, boards.ie is a huge site and a great platform for the likes of you and other green TDs, Mr Ryan being the exception after the disaster of a job he's done with broadband.
But if your straight and honest with people on it you'll get respect and possibly votes.

Thank you and regards,

Unknown said...

Firstly well done on making your thoughts on NAMA public. An example of how a democracy should work!
Its hard to get policiticians views on these things despite trying to contact them. A black mark on our country.

NAMA? - Whats wrong with starting a new bank. A good bank. Anything else is dead money. Just cover the deposits up to the promised 100,000.

Be far cheaper and our pick up will be quicker.

Ciarán said...

Thanks for the comments.
I'd imagine you're in a better position to determine who might or might not be willing to sign that article.

In regard to your Irish Times article, you stated:
"The extent of recapitalisation that will be required is essentially the same under Nama as under nationalisation and will have to come from the State".

Any thoughts on effects on business confidence under NAMA vs. the State? I agree that NAMA, in itself cannot get credit flowing, but I don't want to see the baby of the market thrown out with the bathwater of the financial turmoil of the last nine months.

Getting the purchase price right is crucial, and the outcome of will provide a modicum of stability.

on your last point, of course you don't want to come in and acquire these loans if the valuation is still on a downward slope, that's where good international advice is important.

thanks for the link to Constantin's piece. Certainly, the Oirechtas would have to have oversight, through a mechanism similar to the Public Accounts Committee.

Dreaded Estate,
Transparancy is crucial. I'd like to see those figures, I'd also like to see everything on public view in one of the new snazzy Google Maps applications, then we'd really have a clear picture of what's going on. Actually, as a side-bar to that I believe any option to purchase should also be registered, but that's another blog post in itself.

Solvency is also important, and Krugman for all his criticism in the 'Erin Go Broke' piece, doesn't put forward any bold alternative to the NAMA model, although he does back up the need for austerity. Bad debts don't go away by sweeping them under the carpet.

It would be brilliant we could just produce a magic wand and start again. The problem is that Ireland Inc is linked through loads of financial agreements to the rest of the world, and we can't just wish away our difficulties.

One final point,

John O'Connor, the chairman of Bord Pleanála gave an interesting presentation at the Irish Planning Institute last week. He referred to the possibility of the State through NAMA to assemble land banks – good sites for infrastructure, education, enterprise, amenities. If done correctly, that could rectify many of the ills of the bad planning over the last twenty years.

It's challenging, but I think this could be done.

Jonathan Wyse said...

It seems like there's one big difference between nationalisation and the alternative, although they will obviously require the same funding for recapitalisation of the banks.

Under nationalisation, the recapitalisation and remuneration for troubled assets increases the value of something that the government owns (i.e. the banks). Under the alternative, this money increases the value of privately-held share. That doesn't seem very fair?


James G said...

"Any thoughts on effects on business confidence under NAMA vs. the State? I agree that NAMA, in itself cannot get credit flowing, but I don't want to see the baby of the market thrown out with the bathwater of the financial turmoil of the last nine months.

I can't see how there would be a further loss of confidence from nationalizing the Irish banks since the market has zero confidence in them right now.
They are trading at levels which suggest that the market believes them are completely insolvent. The only reason they haven't done bust is the government's guarantee.
Further backing by the government in the form of nationalization would if anything enhance the banks standing in international markets.

"Getting the purchase price right is crucial, and the outcome of will provide a modicum of stability.

on your last point, of course you don't want to come in and acquire these loans if the valuation is still on a downward slope, that's where good international advice is important.

Getting the purchase right will be almost impossible regardless of what advise is taken. It just isn't possible to value something where there is no market.
The chances of mistakes on loan valuation being made are huge and the consequences for the future of the state are even greater.
But if the government choose to nationalize the banks pre NAMA the single biggest risk to the state, namely the pricing of the loans, disappears.
Once the banks are nationalized buying the loans is just like transferring them from one arm of the government to another. If the price is too high one arm benefits if it is too low the other arm benefits.

"Dreaded Estate,
Transparancy is crucial. I'd like to see those figures, I'd also like to see everything on public view in one of the new snazzy Google Maps applications, then we'd really have a clear picture of what's going on. Actually, as a side-bar to that I believe any option to purchase should also be registered, but that's another blog post in itself.

I'm glad that the Green Party and yourself agree that public transparency at the level outlined by Dreaded_Estate is not just desirable but absolutely essential.
But I fear that when the time comes the government and the Green Party will once again hide behind customer confidentially. If that happens I, as one of your constituents, urge you to explain the basis for the change in Green Party policy on this very website.

I will make one final point Ciaran
Given that the view of so many people from Irish economists, to the ESRI, to the IMF and most other international commentators is so against the idea of NAMA without nationalization to the point that outside the government and its advisers, the stock brokers and the banks there is virtually no support for this plan as it stands, do you really feel the government is correct in its view?
And are the Green Party and yourself so sure that you are willing to bet the future of the country on it?

I think you really need to think long and hard on these questions.

As a regular Green Party voter I was delighted when you got into power and that you are getting through good Green policies. But I really don't care how good those policies are if you mess up this decision, myself, and many other like me will NEVER vote Green again.

Robert Browne said...

The state already has enough schools, what about putting roofs on the schools we have? Just get rid of the pre-fabs (costing 60 million pa.) and build real class rooms where the pre-fabs are now. There are empty factories up and down the country in every single industrial estate, we do not need NAMA in order to get land, buildings, half finished apartments, and housing estates on the edge of villages etc.

Has anyone ever flown over this country in a plane? Seems not! There is no land scarcity in Ireland it is like flying over the Praries, only a myth of land scarcity, which drove the price of "development" land through the roof! We do not need to buy assets nobody else wants i.e toxic, non productive and non performing.

This country needs a banking system but not the one we have now which is not worth rescuing for 63b and will end up bankrupting the state. The government should put the money into a good bank, for instance, a good Canadian bank and let the others fall on their own sword and lets get on with it!

As for all the economic geniuses, where were they when the economy was still on an upward trajectory but running on empty? Morgen Kelly, David McWilliams George Lee, fair play, but the rest had to set up a website "Irish economy.ie" to play catch-up with what was going on outside the lecture halls of Trinity and UCD. The words credit crunch, securitization and sub-prime were not words in their vocabulary when they needed to be. They were all discovered in hind sight, which tells you everything you need to know about people who 'lecture" us all on economics, including Mr. Bacon who was a player in the splurge or bubble. NAMA is just the mother of all quango's and the mother of all mistakes.

Dreaded_Estate said...

After the revelations that the state will have to put €4B into Anglo now and another €3B in a few months with the possibility of more to follow, do you still feel the government and the GP has made the correct choices Ciaran?

Can you explain why you think the costs of letting Anglo fail are greater than the cost of keeping it going?

Why have the GP been so silent on making the bondholders pay their fair share?

Dreaded_Estate said...

I hope you haven't forgotten about NAMA Ciaran.

Do you still think this is the best plan for the country?

Unknown said...

I wonder if you have any views on NAMA taking on the loans of the non-resident banks here? That could be 17b more....

Sujan Patricia said...

Paul Krugman was awarded the 2008 Nobel Memorial Prize in Economic Sciences for devising a new theory to answer questions about free trade. He is just one in several economics experts that have advised recently that the recession appears to over and that the economy is growing again this quarter.

Anonymous said...

It seems Ciaran has given up engaging on NAMA, even though it is the biggest decision that any Irish government has had to make.

Anonymous said...

Do you still think NAMA over paying by billions is the best solution to the banking crisis Ciaran?

Where is the transparency, where is the risk sharing?

Ciarán said...

The State's duty is to protect its citizens.

It is important to ensure that the State can borrow money at a reasonable rate of interest.

This influences any decision on whether to absorb possible losses by the loan capital or other means