Irish Independent, Aug 9th 2009
IT is basic economics that it’s a bad idea to tell somebody whom you’re buying something from in advance that you’ve decided to deliberately pay more than anyone else will.
However, this is what our Government’s draft Nama legislation is proposing to do with perhaps as much as €60bn to €70bn of our money — about €15,000 for every man, woman and child in this country.
The Nama bill is 136 pages long, most of it tedious. But the key bit is as follows: Page 50 of the bill describes something called the market value of an asset as the price that would be paid “between a willing buyer and a willing seller in an arm’s length transaction where both parties acted knowledgeably, prudently and without compulsion”.
Fair enough. So, how much are we going to pay?
Page 51 tells us that we will buy the assets at “(i) their current market value, or (ii) a greater value (not exceeding their long-term economic value) that Nama considers appropriate in the circumstances”.
So what is this long-term economic value that Nama will consider appropriate to pay using our money? It’s hard to know — the legislation mentions something about a value that the assets “can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated”.
Take this in for a minute. There’s a value that prudent, knowledgeable people would pay for these bank assets (being prudent and knowledgeable, presumably they know the current crisis won’t last forever). And then there is some higher value that we are going to pay, based on something about things becoming ameliorated.
Perhaps that makes you a bit uneasy, but I hear many of you saying that there must be some great benefit to us from paying too much for these assets.
Indeed, we are constantly told that we need to overpay for these assets because we need to save “the banks” because they are crucial to the economy.
Well, banks do indeed play an important role in the economy, but forget about banks for the moment, let’s focus on who owns these banks. Who gets the extra money that we have decided to deliberately overpay for these assets? The bank shareholders.
Nama is a conscious policy of transferring billions of euro through overpayment from the taxpayer to bank shareholders. These are the same bank shareholders who appointed and cheered on the boards of directors that contributed to bringing the Irish economy to its knees.
Now, distasteful as this is, surely there must be some good reason for it, I hear you say. For instance, people like Pat Farrell from the Irish Bankers Federation tell us that “our banking system cannot absorb” the losses that would be incurred from the Government paying what these assets are worth.
But again this confuses our leading banking institutions, which we need to help, with their current shareholders, who we don’t. The Government has committed to provide whatever investment is required to ensure that our banks are adequately capitalised after the losses associated with Nama.
And it has stated that it will take an equity stake in the banks in return for these investments. One way or another, the plan is to recapitalise our banks. What is at stake here is the ownership structure after Nama.
So do not be fooled: Those who defend the impending over-payment with our money are actually expressing a desire to minimise the losses that the Nama process will trigger for current bank shareholders and, by the same token, expressing a desire to limit state ownership of the banks.
Remember that once these banks are cleaned up and recapitalised, a state equity stake could have considerable value. The overpayment enthusiasts would prefer to use our money to keep that value for themselves.
Hanging over this whole process, of course, is the question of nationalisation. Without Nama’s friendly overpaying intervention, the banks in their current incarnation are facing enormous losses on recklessly made loans.
The main Irish banks have been desperately trying to hide from us exactly how big these losses are. But Dutch-owned ACC (apparently being kept off the Nama gravy train) have done the Irish taxpayer a great service by exposing the true state of the accounts of one “leading” developer, Liam Carroll, whose Zoe group now admits it can only pay back a quarter of its loans. Given the size of the major banks’ development portfolios, paying anything close to current market values for their bad loans would almost certainly see them being nationalised.
And this, we are repeatedly told by the Government, is A Very Bad Thing.
Again, this is largely scare-mongering. Permanent nationalisation of banks generally leads to bad outcomes but nobody is recommending this. Instead, what should be undertaken is a temporary nationalisation of those institutions that turn out to be insolvent, something which has been recommended by the International Monetary Fund, and which has worked as part of successful resolutions of banking crises in countries such as Sweden and Norway.
Even if the Government doesn’t agree with me about the limited dangers of temporary nationalisation, it has done little
to explore the available options for getting private ownership involved in banks like AIB while still paying a fair price for their assets. This could be done, for instance, by offering debt-for-equity swaps to certain classes of bondholders or by negotiating with foreign banks or private equity firms to take ownership stakes. Instead, the Government would prefer to line the pockets of domestic bank shareholders. It is a legitimate question to ask why.
So this is where the Nama process is right now. They have as good as told us that they are going to pick our pockets to give large amounts of unnecessary money to bank shareholders. And we are expected to cheer this process on.
Well, we don’t have to. Even if a Nama-like process is required to clean up the Irish banks, there is no need for it to rely on the awful “long-term economic value” approach to pricing. This is your hard-earned money they’re wasting at a time when valuable public services are being cut and your taxes are being raised.
Meanwhile, delinquent property developers are being indulged while regular people who can’t pay their mortgages are being evicted. It’s time to let your local representatives of the Soldiers of Destiny, An Comhaontas Glas and their remaining independent supporters know what you think of this plan.
Karl Whelan is Professor of Economics at University College Dublin
Irish Independent, August 9th 2009.