April 14, 2009
Those familiar with George Orwell’s classic,1984, no doubt recognised doublespeak when they heard it last week in DÃ¡il Eireann. In 1984, the official language of the state described things as being precisely the opposite of what they actually were. In Ireland, the Cowen administration is at the same thing. Have they no shame?
Last week, in true Orwellian style, fearing the catastrophic collapse of our balance sheet due to the liabilities of the rotten banking system, the government came up with an agency, which they called the National Asset Management Agency (NAMA).Who do these people think we are?
The toxic debt of the banks is no more an asset than the defaulted debt of Argentina is an asset. It is a liability, for God’s sake. If these loans were assets, there would be no problem. But they are worthless pieces of land and ludicrous property deals, which are now dragging this country down.
These loans and their peddlers – the banks and the developers – are the financial anvil that is dragging us under.
Even Orwell would have blushed. Our government, not content simply to spin, has resorted to trying to change the meaning of language. It’s hysterical, in the true meaning of the word.
Now that I’ve got that off my chest, let us examine the Orwellian NAMA project.
Well before Christmas, this column argued that the best thing we could do was to introduce a ‘financial skip’ into which we would need to throw all the bad debts incurred by our bankers and developers in the boom.
Back then, the so-called experts were saying that the banks were fine and that Ireland should not do anything too radical. My idea was seen as radical. Like all new ideas, it has gone through the typical three stage cycle of ridicule, followed by violent opposition, and ultimately universal acceptance.
Initially, the ‘skip’ idea was dismissed by representatives of the banks and the regulator, who said that their stress-testing showed the banks were in good shape.
Then it was violently opposed, as seen on a recent Prime Time show on RTE television, by those who regarded it either as an open-ended bailout or those who argued the opposite – saying that the recapitalisation would be sufficient. Now it is being universally accepted, as set out in the budget.
Like all these initiatives, the devil is in the detail. The crucial thing is that we, the people, do not pay ‘cash for trash’ and bail out the banks, which is why this column argued last week that the financial skip was the right way to go, but its financing had to be structured so that it cost the taxpayer nothing.
Two significant issues are at stake. The first is the extent of the write-downs, and the second is, who will pay? Both are related.
In its simplest form, the less the state pays for the assets, the more the banks, their shareholders and the developers will pay. If the state buys assets at moderate discounts, the taxpayer will pay. So is it in everyone’s interest that we buy the assets at rock bottom prices? Yes it is, but that’s not the end of the story.
As there is no market now, if the state were to buy assets at today’s prices, it could acquire this land at a huge discount of 20 per cent of book value. The minister says he is looking at a toxic book of â‚¬80 billion to â‚¬90 billion. (It’s a bizarre world when â‚¬10,000,000,000 is seen as a rounding error – but there you go!)
This means that the banks lose 80 per cent of that book value of about â‚¬64 billion. The taxpayer takes on â‚¬16 billion of debts now for a possible upside of â‚¬48 billion if property assets were ever to go back up to 2006 prices. In such a case, the taxpayer would be reasonably well protected and could get a significant upside.
But the banks would be hammered and would be paying the cash back to the taxpayer for years. It means shareholders would be torched and, for many years, Irish banks, even after consolidation, would not be in apposition to pay dividends.
The banks would have escaped nationalisation, but we would face massive bank charges for some years. Obviously, Irish people would prefer to do business with whatever new entrants came into the market.
One other concern we must have – unpalatable as it may be to many – is that it is important to keep certain developers and certain delinquent borrowers on the hook. If we wipe out any possibility of their making money on some of the assets that we now own, but they will still administer, they might throw in the towel.
This means giving them some ‘hope value’ in the ‘haircut’ they are to take. We have to make a judgment call as to whether we, the taxpayers, represented by the Orwellian NAMA, actually want to operate all the empty hotels and golf courses that will no doubt end up in the skip.
Therefore, the price of the discounts might not just be about today’s market price, but might have to keep places open. It would be a mistake to make the discount so severe as to force many firms out of business because the owners can’t see any future. This is a tricky conundrum, but one that we have to tease out.
On the positive side, NAMA will effectively be the Irish property market for the next ten years. This means that, with enlightened management, we could get planning right.
We could also judiciously release properties onto the market in the coming years, so that the cowboy era of the past ten years is banished to history.
Thus the people in charge of this new agency need to see how it fits into Irish society, as well as simply Irish finance. They will need to be more than just liquidators, accountants and debt ‘workout’ specialists. At the top, we need people who have a vision for what type of country we want to rebuild.
To do this, we need regime change, and the current jokers need to be replaced by a new generation of competent Irish people. In short, we need a generational change, because a huge proportion of the upper echelons of Irish finance is implicated in the land/banking scam of the past five years.
The banks need to be cleared out – as must the senior public servants who oversaw this lamentable state failure.
Many of the most delinquent former princes of the Irish boom will fall on their swords. The liquidators appointed by NAMA must make the key decisions, not the politicians. If we allow ourselves to be conned again by this government, either by allowing it to control NAMA with its own cronies or, worse still, to be forgiven at election time, we ourselves will be responsible for a truly Orwellian nightmare.