February 28, 2010
Have you heard of Neelie Kroes? Last November, this column said that the European Commission would save us from the crazy excesses of our politicians – and it delivered last Friday.
We should get down on bended knees, because the commission worries more about your money than the Irish politicians you voted for.
Last Friday, the commission – with Joaquin Almunia now holding the competition brief – told this reckless, incompetent government, which has been throwing around billions of our money as if it were confetti, to get a grip. The commission has said the valuations the government is putting on land for Nama are too generous to the banks.
Despite this, the spin put out from Merrion Street is that the commission was happy with Nama. This is not the case.
Closer reading of the press release suggests there is considerable unease in the European Commission about our latest ill-advised adventure. Of course, the mainstream media swallowed the government’s spin hook, line and sinker. No surprise there.
However, the press release, designed to obscure, not inform, is quite different. Hidden in the Department of Finance’s press release, there is a crucial line that states: ‘‘Within the valuation methodology, a higher remuneration risk margin and higher enforcement costs will be applied.”
As a result: ‘‘It is not the minister’s intention to perform another top-down aggregate estimate of the potential haircut that the institutions will face.”
This means, in plain English, that the commission believes the government is trying to shaft us, the taxpayers, with its optimistic valuations. It has told the government that there is no way the commission will allow it to stick to its original 30 per cent discount.
You might remember that, originally, the government said that it would apply a 30 per cent discount to the property loans Nama was supposed to buy off the banks.
The commission has obviously told it to snap out of it. The commission maintains that the valuations will have to come down significantly from the minister’s original estimates.
This clearly means that Nama will not make a profit – which was the silly spin of last year. It also means that, unless there is another inflated property bubble, the taxpayer will be left holding fields in Mullingar that no one wants.
The meaning of the minister saying he will no longer give ‘‘another top-down aggregate estimate’’ is that each loan will now be evaluated on a case-by-case basis, as opposed to the government’s original blanket discount approach. This means there will be enormous variations in every bit of property that goes into Nama.
Logistically, we can already see how this Nama is going to grow to be a bureaucratic monster.
On the upside, the commission’s intervention could be good news for taxpayers. But why did the commission side with the taxpayers while the government sided with the banks? Why would the remote commission side with ‘outsiders’, while elected politicians side with the ‘insiders’? What happened to the assumption that the government acts with the best interests of the people at heart?
The commission not only believes the government is living in cloud cuckoo land, but must be perplexed at the behaviour of ministers who tried to railroad through valuations which would impoverish the taxpayer, and enrich the banks and their investors. This stance of our politicians is quite extraordinary, and the opaque language of the press release is depressingly revealing.
Rather than speak plainly about this huge financial gamble, our government – possibly because it knows Nama is a mistake – tries to obscure the truth and muddle through. Pathetic really.
Why did the commission act to constrain the government? Maybe the commission saw the news from Athlone last week that development land valued at â‚¬31million in the boom is now worth only â‚¬600,000.Could it be that this 98 per cent fall in the price of development land made the commission think again about the 30 per cent discount that the government was trying to get away with?
The commission – unlike Brian Lenihan – concluded what the dogs on the street know to be true: much Irish land is almost worthless now. To force the Irish taxpayer to pay the difference between today’s price and the boom price would bankrupt the place. It also saw that what the Department of Finance was trying to do with the 30 per cent discount was keep the wretched Irish banks open by giving them an unfair ‘dig-out’ – or, in EU parlance, state aid.
So we know why the commission acted as it did, but why has the government acted against the interest of the taxpayer? The Brian Lenihan who discussed banking issues with me never struck me as someone who would put the banks’ interests ahead of the taxpayers’. In fact, the rhetoric suggests the opposite, but the reality is that he has put the banks before the people.
He is advised by people who, from the beginning, wanted a certain outcome, irrespective of the facts. The people who came up with Nama had the answer they wanted before they asked the questions. They wanted to keep the banks as private entities at all costs.
The banks are required to hold a certain minimum amount of capital. If a bank is trading recklessly without sufficient capital, someone has to inject capital. But without investors, the government has to nationalise. Of course, for ideological reasons, Lenihan and his gang wanted to avoid nationalisation.
The other night, as I was doing sums with my seven-year-old son, I thought of an easy way to explain the government’s dilemma which the commission has seen through. We were doing additions and takeaways at the kitchen table. We lined up rugby players to visualise the sum and make it easier.
Using the sin bin analogy, which kids love, the sum is how many Irish rugby players would be left from seven if five were sin-binned. The answer is two rugby players.
Let’s turn it around and say then if seven rugby players minus five rugby players is two, what is five rugby players plus two rugby players? Answer: seven.
OK, so what’s two plus five? Wow, it’s seven. So if I have seven players and I want to be left with two players, what do I take away? Answer: five. So if I want to be left with two – not one or nil – and I start with seven? The answer has to be five.
Now think of Nama. Lenihan started with â‚¬70 billion-odd of bad developer loans. He needed to have capital of â‚¬20 billion (some of which he had in the pension fund), so the value of the bad loans couldn’t be lower than â‚¬50 billion odd.
So the clever people behind Nama knew the answer to the question before they asked it. The discount had to be 30 per cent, not because that’s what the land was worth, but because anything lower than that risked having to nationalise the banks.
This is why they have tried to rip off the taxpayer, when we know that the value of land has fallen by much, much more than that. This is why they keep blustering and spoofing, and this is why the commission called their bluff.
If only they had been up-front at the beginning, they would have saved us all this angst. They could have told us that Nama was never about land, but was always about protecting the banks – which the government erroneously thinks are viable only with the present ownership structure.
This would have explained their irrational and, at times, tragicomic obfuscation. But then again, could it be that maybe being this straight-up is just not in their nature?