Alan Ahearne Backs Down!

August 26, 2009

Hi,

Hope you like the new blog theme. Click ‘Storage’ on the right for similar posts. This post examines the NAMA Draft Legislation pp35 – 75 approx. Its not in the forensic detail this exercise requires, but I hope enough detail, to help you in your own judgement.

Unfortunately, government silence on the draft legislation is so deafening that its now reduced to occasional outbursts by Alan Ahearne, advisor to the government, or minimalist contributions by Brian Lenihan, Minister for Finance, or even less input ‘its complex legislation’ by Brian Cowen. We do not get any forensic line by line analysis  by way of  a public information service by the government. Most FF membership is against NAMA.

We could do with more input by RTE instead of piecemeal short interviews that can  inevitably descend into sound bites that leave you asking for more.

Primetime and other programmes could and should do more given the depth of the implications for the financial welfare of our country. It’s time we began the NAMA hearings, where a group of supporters of NAMA, a panel of experts, capable of describing/defending its technical detail were questioned by an informed audience on front of the cameras.

It’s worrisome the government appears instead to be stifling debate by way of its lack of information. The silence itself becomes a form of  NAMA propoganda.

They’ve done this quite a bit in the past, let the controversy pass, ignore it, proceed with crazy voting machines, decentralisation, etc. and continue to ignore, if not  silence  and pillory their critics as delusional pursuing policies that are dangerous and suicidal.

In reality, its the other way around, government policy in the draft NAMA legislation, is delusional, poorly if not crazily drafted, and economically suicidal.

There was a good example of this, this morning, on Morning Ireland. Alan Ahearne,  NUI Galway currently economics advisor to Brian Lenihan, Minister for Finance, was brought in to defend the government position on NAMA against the published list of economists, 46, against NAMA in the Irish Times today, about which more in a later post. We await Alan Ahearne’s published list of signatories in favour of NAMA?

The economists were advocating that NAMA should buy back loans based on their ‘current market value’ and not on their ‘long term value’ as given in the draft NAMA legislation.

Ahearne judiciously avoided ‘long term value’, dealt with here more anon, by
stating that e.g. agricultural land if subject of a toxic loan and currently zoned as agricultural would be valued by NAMA as  agricultural land.

Loans would be investigated on a loan by loan basis by NAMA and NAMA would pay the curent market price for this land. He also flagged the NAMA project would be concluded within 10 years. He also said that NAMA will be looking for ‘Debt for Equity, after the valuations are done’, ‘Equity Stakes’.

Ahearne,  cowboy that he may be  is trying to make it up as he goes along, in its present form the NAMA draft document is what it is,  ‘long term economic value’, is the term used, it means what it says, and contrary to what Alan Ahearne would have us think, ‘long term economic value’ does not mean  ‘current market value’ as assessed by the NAMA valuators.

Ahearne cannot  call a spade a spoon! Foolishly, he cannot see the emperor, NAMA,  has no cloths on!

Commenting here as an informed observer ready as much as I can to analyse and assess information I have about NAMA, its difficult to go through the proposed legislation without observing how flimsily put together, how unclear, how mind bogglingly unsafe it is in its present form, how risky it is for the tax payer, how little definition there is in legal terms of the terminology it uses, how wide ranging in the amount of power it invests in so few, Minister and NAMA officials, in a democracy that prides itself on judicial and legal and political constraints.

In its present form NAMA legislation has more similarity to an edict from a dictator in some far off banana republic than any form of legislation we are used to on this island. Lacking in safeguards to protect our interests as tax payers, it threatens to sink our country.

The mere fact that it will corner the property market as a behemoth property
player, one wonders how the ECB (European Central Bank) will be able to stand over its monopoly effect on the Irish property market. ‘Current market price’,  under NAMA,  becomes a nebulous price index that becomes difficult to calculate. Without NAMA it has one value, without a buyer such as NAMA it most likely has another price.

The best way forward imho for an open, agile economy, as we claim to be, is to take NAMA out of the equation completely. The whole project is a waste of money and resources and will burden an already burdened economy even further by taking us into quicksand.

The government should stay out of the property market. Let the banks renegotiate with their bond holders and decide if they want to get involved with debt for equity swaps with the banks to whom they, the bond holders, also have advanced ill advised loans. They are well able to solve their own problems. There may well be firesales of assets, property/land investments as a result of this. They don’t need NAMA to step in and do this for them, that is what they do.

OK, so some banks may fail, others will fall. Others, such as Permanent TCB who posted their own losses recently and who intend to trade out of these, will stay away from government intervention and solve their own problems.

This ought to be Stage One in any solution:

Let the banks try to sort out their own problems. If banks go under and there are fire sales of land/property, so be it, let the market deal with this. It may surprise our government the value given to banks in Ireland cleansed and put on a new sure footing and the willingness of international investors to get involved through  debt for equity swaps. As Fine Gael have put forward, see earlier post, the bond holders need to be brought into the equation as part of a debt for equity exercise that may save some banks.

This ought to be Stage Two in any solution:

Where banks are clearly going under, and are deemed worthy of saving, debt for equity swaps based on the market value exposed in Stage One, should take the tax payer into a role of investor through some instrument similar to NAMA but only if safeguards are locked into place. One of the best safeguards as pointed out by the IMF and others is nationalization.

This ought to be Stage Three in any solution:

Nationalization through Two above, if necessary, should be temporary. Specific safeguards need to be written into any legislation underpinning this.
The only way to do this is to set specific timeframes for the completion of this project. This would inevitably mean a fire sale, so that the books need to be cleared within say 5 years, no longer.

We need to clean away the mess created by this calamity as soon as possible to return to an agile, nimble economy, unburdened by NAMA.

NAMA in its present cowboy, flimsy, inept and poorly drafted mode is a cancer that can collapse the futures of future generations. Our country has many, many, smart people, a lot smarter than this writer, who work within and have attracted a lot of foreign investment over the past decade, we all deserve the best and smartest solution to solve this.

Hopefully, their voice will be heard. It was not listened to re. voting machines, decentralisation, or the property bubble. Perhaps this time the voice of reason will prevail and the delusional thinking, that is NAMA, will be publicly exposed, and we will get a solution to inspire us all.

Fine Gael’s arguments pivot on what ought to take place to deal with the crisis up to and including nationalization  while Labour as expressed below primarily offer a critique of FF NAMA legislation that offers the panacea of nationalization of the banks as a solution to the crisis.

Imho there’s scope for a meeting of minds between both Fine Gael and Labour to combine policies following a think tank exercise. Both policies lack sufficient detail (see earlier post re Fine Gael, Humbert School). While Fine Gael give detail around Stage One as  described earlier in this post, Labour detail Stage Two, argued here is the need for Stage Three Fire Sale.

Stage Three is managing the cleanup. Cleaning out the toxic debt. Getting rid of the debt, putting the safe guards in place hopefully with the help and support of the IMF by following their advice to the letter and availing of any IMF loans that may be advanced to restore our country’s competitiveness. The answer is not to ignore the IMF and bet again.

Note Stage Three is separate and distinct from Stage One, where the banking industry is asked to mend itself, along the lines of what Fine Gael have called for, or Stage Two, where nationalization is invoked to reduce the exposure of the tax payer where required,  Stage Three is the conclusion of the exercise within a specific timeframe of not more than 5 years.

This, if required, requires a fire sale of the land/property involved to allow property values to return to market place values as soon as possible and to avoid the tax payer put into a situation where the cost of property conceals a hidden NAMA tax ie NAMA turns into an Orwellian ‘Big Brother’ keeping property off the market to bubble the cost of property, or worse, becomes infiltrated and totally corrupt through secret political deals between politicians, developers and shareholders. It appears to me looking at the prosed legislation that NAMA is already a product of that route.

Here, as promised, extracts of Joan Burton, TD,  Deputy Leader of Labour, speech to Humbert Summer School ( see previous post ). Note remarks concentrate on nationalization.

From the http://www.joanburton.ie website:

“Speaking today at the Humbert Summer School in Ballina, Co. Mayo, Deputy Leader of the Labour Party, Joan Burton TD examined the dangers posed by NAMA for generations of Irish taxpayers. She called on the Government to allow real, constructive debate on NAMA and to avoid putting future generations in hock for billions of euro by overpaying for dodgy assets.

I wish I could say to you here that every clause will be scrutinized with care. That is unlikely. Take the Bank Guarantee. I recall going for a briefing to the Department of Finance. I suggested a few amendments that might impose some limits on taxpayer exposure only to be told that the Government would not accept any amendment.
The role of the Dáil was to rubber stamp the Bill and no other.
The NAMA Bill rests on one particular clause Section 58 which sets out the rules for valuing the bank loans. It is a shoddy piece of work that does no credit to the Minister.
It could hardly be otherwise as Brian Lenihan is attempting, like Janus of the ancient Roman myth, to show two faces to the world looking in opposite directions.
One face is the Minister who needs to insist on the protection of the public interest. So the clause sets out current market value, however diminished, as a principle. That is what the former Swedish Minister Mr Lundgren recommended in his evidence to the Finance Committee. The results from AIB and the evidence presented in some of the High Court cases show just how heavy a discount is properly called for.
But Minister Lenihan also presents a different Janus face, reflected in a second basis of valuation contained in Section 58, a potentially bogus concept called Long Term Economic Value, which is the convenient cover he and Mr. Cowen use for a policy to pay way over the odds for the banks’ dodgiest loans on the pretext that the assets so acquired have an enduring value that is not reflected in the current market. That is political and economic mumbo jumbo.
I cannot believe that Dáil Eireann will pass so flawed a clause as section 58. Surely there are Cabinet Ministers who have qualms. Surely there are FF and Green backbenchers who will baulk at the shocking abdication of public interest that is inherent in Section 58.
This is the coming test of our parliamentary institutions:
To fight or to abdicate on Section 58.
To abdicate responsibility and to allow this clause to stand is to abandon the legislative role of the TD and to install a Cowen –Lenihan parliamentary dictatorship that is allowed to rule by decree without scrutiny or amendment.
Section 58 cannot pass proper scrutiny. It fails every test. Long Term Economic Value as defined in this section merits the exact words, ‘fanciful’ and ‘ lacking in reality’ used by Judge Kelly in rejecting Liam Carroll’s application last week.
The discount to be applied by NAMA has to reflect the current reality. Any consideration of future value has to be postponed till conditions in the economy generate such value. I can appreciate Professor Honahan’s suggestion that banks could share in any future value when the State has recovered its costs in full. But the evidence remains overwhelming that nationalization remains the safest policy as it does not require early valuations to be placed on the transfer of loans which would be between different public bodies. Mr. Lundgren emphasised this aspect on his visit to Dublin last month and it has a compelling logic that deserves greater public debate as an alternative to the gaping flaws of the entire NAMA set up.
So how does the IMF judge a Government’s resolve?
The IMF staff looks into the eyes of the Minister of Finance and decides whether the government is serious. The fund will give a country a loan but first it wants to make sure the Minister is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the IMF can wait.
I wonder how an IMF team would judge the capacity of this set of Ministers to face down their old cronies. Would a serious IMF team look at Brian Cowen in the eye and see there a man with the resolve with the determination to show his former friends the door.
Well would he? I think we all know the answer to that. It might have to come to that eventually but first this Government has a mindset that the plain people of Ireland are to be the first in the firing line, the children of Ireland are to be the target of cuts in welfare, in education, in health care before any effort is made to face down the elite that has been the favoured recipient of public largesse, of tax breaks, of easy tax exile status, of Cinderella rules, of public contracts.

Speaking today at the Humbert Summer School in Ballina, Co. Mayo, Deputy Leader of the Labour Party, Joan Burton TD examined the dangers posed by NAMA for generations of Irish taxpayers. She called on the Government to allow real, constructive debate on NAMA and to avoid putting future generations in hock for billions of euro by overpaying for dodgy assets.

I wish I could say to you here that every clause will be scrutinized with care. That is unlikely. Take the Bank Guarantee. I recall going for a briefing to the Department of Finance. I suggested a few amendments that might impose some limits on taxpayer exposure only to be told that the Government would not accept any amendment.

The role of the Dáil was to rubber stamp the Bill and no other.

The NAMA Bill rests on one particular clause Section 58 which sets out the rules for valuing the bank loans. It is a shoddy piece of work that does no credit to the Minister.

It could hardly be otherwise as Brian Lenihan is attempting, like Janus of the ancient Roman myth, to show two faces to the world looking in opposite directions.

One face is the Minister who needs to insist on the protection of the public interest. So the clause sets out current market value, however diminished, as a principle. That is what the former Swedish Minister Mr Lundgren recommended in his evidence to the Finance Committee. The results from AIB and the evidence presented in some of the High Court cases show just how heavy a discount is properly called for.

But Minister Lenihan also presents a different Janus face, reflected in a second basis of valuation contained in Section 58, a potentially bogus concept called Long Term Economic Value, which is the convenient cover he and Mr. Cowen use for a policy to pay way over the odds for the banks’ dodgiest loans on the pretext that the assets so acquired have an enduring value that is not reflected in the current market. That is political and economic mumbo jumbo.

I cannot believe that Dáil Eireann will pass so flawed a clause as section 58. Surely there are Cabinet Ministers who have qualms. Surely there are FF and Green backbenchers who will baulk at the shocking abdication of public interest that is inherent in Section 58.

This is the coming test of our parliamentary institutions:

To fight or to abdicate on Section 58.

To abdicate responsibility and to allow this clause to stand is to abandon the legislative role of the TD and to install a Cowen –Lenihan parliamentary dictatorship that is allowed to rule by decree without scrutiny or amendment.

Section 58 cannot pass proper scrutiny. It fails every test. Long Term Economic Value as defined in this section merits the exact words, ‘fanciful’ and ‘ lacking in reality’ used by Judge Kelly in rejecting Liam Carroll’s application last week.

The discount to be applied by NAMA has to reflect the current reality. Any consideration of future value has to be postponed till conditions in the economy generate such value. I can appreciate Professor Honahan’s suggestion that banks could share in any future value when the State has recovered its costs in full. But the evidence remains overwhelming that nationalization remains the safest policy as it does not require early valuations to be placed on the transfer of loans which would be between different public bodies. Mr. Lundgren emphasised this aspect on his visit to Dublin last month and it has a compelling logic that deserves greater public debate as an alternative to the gaping flaws of the entire NAMA set up.

So how does the IMF judge a Government’s resolve?

The IMF staff looks into the eyes of the Minister of Finance and decides whether the government is serious. The fund will give a country a loan but first it wants to make sure the Minister is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the IMF can wait.

I wonder how an IMF team would judge the capacity of this set of Ministers to face down their old cronies. Would a serious IMF team look at Brian Cowen in the eye and see there a man with the resolve with the determination to show his former friends the door.

Well would he? I think we all know the answer to that. It might have to come to that eventually but first this Government has a mindset that the plain people of Ireland are to be the first in the firing line, the children of Ireland are to be the target of cuts in welfare, in education, in health care before any effort is made to face down the elite that has been the favoured recipient of public largesse, of tax breaks, of easy tax exile status, of Cinderella rules, of public contracts.”

commentary on Legislation Proposals next post!

rgds

Colm

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