Thinkers and Wafflers (WATS)

August 30, 2009

Say No To NAMA

Say No To NAMA

Thinkers ask hard questions, like to analyse with scientific objectivity, take apart, test and probe and are open to the findings of robust testing from peers who share the same critical, investigative approach.

Thinkers are people who like to vector in questioning to verify  facts regarding the object of investigation/analysis.

Wafflers don’t think that way, they are blown by the wind of ignorance, bias, uninformed emotion and they are deeply suspicious of thinkers. Hopefully the following will help myself and others to think a little bit better!

My comments in italics below:

http://www.finance.gov.ie/viewdoc.asp?DocID=5878

So, in line with the stated purpose of objective analysis here, lets examine the most contentious part of the draft legislation:

“PART 5

VALUATION METHODOLOGY

(4) NAMA may, if it considers it appropriate after consultation with the Minister, and subject to any regulations made by the Minister under subsection (5), having regard to—

(a) the purposes of this Act,

51

National Asset Management Agency Bill 2009

For public consultation purposes only

(b) the expected date of acquisition of the bank asset concerned,

(c) the type of bank asset,

(d) the rules in relation to State aid made by the Commission of the European Communities, and

(e) any other relevant matter affecting valuation, determine that the acquisition value to be assigned to particular bank assets or class of bank assets shall be—

(i) their current market value, or

(ii) a greater value (not exceeding their long-term economic value) that NAMA considers appropriate in the circumstances.”

Here NAMA opens itself to the possibility of grave error of judgment.  In place of objective safeguarding of the tax payers interest, introduced is the speculative element, the meaning of ‘long-term economic value’ and ‘current market value’. The tax payer is exposed to risk. No clawback mechanism if this is got wrong. No nationalisation proposed to address the risk. At the root of NAMA is this speculative risky exposure of the tax payer. The phrase ‘long-term economic value’ is a gamblers throw of the dice.

Hopefully the ECB will impose stringent guidelines by way of recommended clawback mechanisms, see earlier post, and additional guidelines on nationalisation when it is required. But you should not depend on this as they may not wish to become involved at this level in our sovereign affairs. The fact that the government allowed the draft legislation to include such weakness without any safeguards whatsoever shows a lack of grasp among legislators of the real issues involved. Simply, this is poorly drafted, fantasy. Its worthy of deep suspicion.

Lets examine arguments made against nationalisation:

Sunday Independent, 30 August, p1″ Minister for Finance Brian Lenihan told the Sunday Independent yesterday that nationalising the banks would be a €4bn ‘bail out’ for shareholders of the State’s two biggest banks.

“Both Allied Irish and Bank of Ireland are valued currently at about €2bn. The state investment in the banks has already seen a returnto the tax payer to the tune of €1bn.”

Wow, Dermot Desmond sold his stake in AIB and BOI at the beginning of August and made €20m, according to Sunday Independent Business. Lenihen has lost the run of himself here. The reason the value of the State stake has gone up is because of the rescue package NAMA promises to shareholders. The reason why Dermot Desmond has sold his holding is because he believes the logic for nationalisation is compelling. Lenihan here has surcumbed to the Ponzi fantasy, the short pay-off that conceals the long term loss built inside the pyramid! These are zombie banks held on life support by the prospect of NAMA. If Lenihan was any use, he would already have introduced a ‘bank holiday’ to prevent investors like Desmond speculating and making money out of  the woes of these banks causing further havoc. Surely, as well as securing depositors money, banks could have had measures introduced to prevent their assets being liquidated by speculators in this way.

According to the Independent, Lenihan goes on to say:

“But, its hard to see how the State could deal with the up-front cost associated with nationalisation, having to pay the shareholders €4bn to assume control and at the same time the Government would have to inject further capital to improve their liquidity positions”, Mr Lenihan said.

This obove bit is the most worrisome statement I’ve ever come across from the Government. To this writer this implies the ship is now rudderless and out of control and running blind. Lenihan just cannot see the difference between a sure bet and the blind gamble exposed to the tax payer without nationalisation. This is reckless, mismanagement of our economy at the extreme.

To me as an independant observer ( I’ve voted for FF in the past, occasionally for Labour and Fine Gael), the most significant point that comes through all of this proposed NAMA Legislation and the way its being dealt with by government, is, how slow the Government has reacted to the crisis. How bereft of depth, clarity, decision making, its response to the banking crisis is. How it chooses to ignore good practice as advised by the IMF and the EU. How its Irish Solution should worry any patriotic Irish person. In its present form, it is incompetent, reckless and irresponsible with the potential to destroy the Irish economy from within. Its an exponential addition to the economic mess we are in !

In the same article, p2, Lenihan is quoted, ‘Were you to nationalise the banks, you would have to do with them what we did with Anglo Irish Bank, that is, nationalise the entire bank. There are a number of dificulties in doing that.

“The key difficulty is we have to fund those nationalied banks on the international markets. But by and large the international markets don’t fund nationalised banks. Lines of credit would disappear overnight.”

Are you reading this incredible waffle from Lenihan? The IMF are advising him to use nationalisation as a clean up instrument. Many, many countries have already done this successfully including Sweden, but ‘by and large’ we can’t. But he likes to have it both ways as the Independent states, same article:

“Both Mr Lenihan and Mr MacSharry believe that the State will end up with a major stake in both major banks anyway”. This is code for, bankers, shareholders and Government will profit from the deal! The Government will enter the casino and we’ll win with tax payers money lining your pockets as well as the pockets of tax payers. Don’t believe this reckless, incompetence for one moment, tax payers money thrown on the fire won’t solve the problem.

The delay in dealing with the crisis, government indecision and poor response has led to the growing difficulties by way of our deteriorating international credit rating. International markets know our banks are zombies held on life support. Nationalisation, with an effective response to our difficulties could improve our credit rating. Nationalisation would also limit exposure of the tax payer to the gamble of getting the solution wrong. Nationalisation would allow the banks to be effectively cleansed before return to market. The course being plotted by Government instead opens the prospect of lining the pockets
of bankers and shareholders out of money that must be paid for eventually by the tax payer. Its a transfer of wealth from the poor to the rich.

Let it be clear that the finger must point to the banks as the prime cause of our crisis. Without diligence, prudence, responsibility they loaded vast amounts of cheap money onto the Irish market place giving rise to a frenzy of borrowing, speculation by developers et al. Unregulated lending by banks and bond holders got us into this mess even more so than the poor decision making of developers and speculators. The only sure fire way of fixing the crisis is the take over the banks through nationalisation and fix them in an orderly and efficient manner as soon as possible.

The answer is not to prop up a failed banking system by turning tax payers money and the economic future of our country into dice to roll into the pocket of a failed banking system. Lenihan has his eyes set on propping up the ponzi scheme of bubble banking, not on its reform through nationalisation. Its time he went, and the sooner the better!

The following are some extracts from the proposed legislation up to item 50 that relate to accountability and transparency of NAMA operations to government. Further sections to be covered here in due course.

“11.

The functions of NAMA

(d) take all steps necessary or expedient to protect, enhance or realise the value of bank assets that it has acquired, including—(i) the disposition of loans or portfolios of loans to the market for the best achievable price,

(ii) the securitisation or refinancing of portfolios of loans thereby refinancing all or parts of the acquired portfolio and redeeming some or all of the Government securities or Government guaranteed securities,

and

(iii) holding, realising and disposing of security;”

NAMA will acquire, with tax payer’s money, bank debt and dispose of it. No particular time frame given or demanded.

“12.

(2) Without prejudice to the generality of subsection (1), NAMA may—

(a) provide equity capital and credit facilities on such terms and conditions as NAMA thinks fit,

(b) borrow or raise or secure the payment of money in any manner, including by issuing debentures, debenture stocks, bonds, obligations and debt securities of any kind, and charge and secure any instrument so issued by trust deed or otherwise—

(i) on the undertaking of NAMA or on any particular property and rights, present or future, of NAMA, or

(ii) in any other manner,

(c) initiate or participate in any enforcement, restructuring, reorganisation, scheme of arrangement or other compromise,”

NAMA can also:

“(t) acquire and dispose of property,

(u) purchase by agreement bank assets that are not eligible bank assets where in NAMA’s opinion it is necessary to do so in the interests of the proper performance of its functions,

(v) invest its funds as the Board determines,”

………..

“(ac) undertake development for the purpose of realising the full value of any asset,”

…………

“Prevention of corruption.

16.—To avoid doubt, the provisions of the Prevention of Corruption Acts 1889 to 2001 apply to every officer of NAMA and the Chief Executive Officer of NAMA and other members of the Board.”

………………

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National Asset Management Agency Bill 2009

For public consultation purposes only

Advisory committees.

31.—(1) The Board may establish such advisory committees as it considers necessary or desirable to advise it in the performance of its functions.

Perhaps there is leeway here to introduce checks and balances, independant oversight and quality assurance framework, performance measurement scope. Transparency questions flow from the following excerpt, e.g will this information be made available on an annual basis. Will specific targets be included. Will progress be recorded?

“2 Annual accounts.

46.—(1) NAMA shall keep, in the form that the Minister directs, proper and usual accounts of money received and expended by it and of all financial transactions undertaken in the performance of its functions.

(2) The accounts shall include a separate account of the administration fees and expenses incurred by NAMA and of each NAMA group entity in the performance of its functions.

(3) The accounts shall include—

(a) a list of all debt securities issued by NAMA for the purposes of this Act,

(b) a list of debt securities issued to and redeemed by each participating institution,

(c) a list of all advances made to NAMA from the Central Fund,

(d) a list of all advances made by NAMA and each NAMA group entity,

(e) a list of all asset portfolios held by NAMA and each NAMA group entity, and the book valuation placed on each portfolio, and

(f) a list of Government support measures, including any guarantees, received by NAMA and each NAMA group entity, and may include any other information that the Minister considers appropriate.”

“Accountability to Committee of Public Accounts.

Accountability to Committee of Public Accounts.

50.—(1) The Chief Executive Officer and the Chairperson shall, whenever required by the Committee of Dáil Éireann established under the Standing Orders of Dáil Éireann to examine and report to Dáil Éireann on the appropriation accounts and reports of the Comptroller and Auditor General, give evidence to that Committee on—

(a) the regularity and propriety of the transactions recorded or required to be recorded in any book or other record or account subject to audit by the Comptroller and Auditor General that NAMA is required by or under an enactment to prepare,

(b) the economy and efficiency of NAMA and each NAMA group entity in its use of the resources made available to it under this Act,

(c) the systems, procedures and practices employed by NAMA and each NAMA group entity for evaluating the effectiveness of its operations, and

(d) any matter affecting NAMA and each NAMA group entity referred to in any special report of the Comptroller and Auditor General under section 11(2) of the Comptroller and Auditor General (Amendment) Act 1993, or in any other report of the Comptroller and Auditor General (in so far as it relates to a matter specified in any of paragraphs (a) to (c)) that is laid before Dáil Éireann.”

Accountability to Committee of Public Accounts is welcomed.

There is also some check and balance here:

Appearances before another Oireachtas Committee.

51.—(1) The Chairperson and the Chief Executive Officer of NAMA shall, if requested to do so by a Committee (or a subcommittee of such a Committee) appointed by either House of the Oireachtas or jointly by both Houses of the Oireachtas (other than the Committee on Members’ Interests of Dáil Éireann or the Committee on Members’ Interests of Seanad Éireann) to examine matters relating to NAMA—

(a) attend before that Committee, and

(b) provide that Committee with such information as it requires.

Be very suspicious of NAMA, it has no cloths on! Given the experience of Sweden, see previous post, when there is a good, smart model and paradigm already there as a path to follow, the answer to the question, how is the NAMA model better or worse than Swedish expertise, will show  how adept or inept we are as a nation in Europe.

The answer may be that we are dumb enough to allow NAMA as presently constituted and proposed, to destroy us from within, a victory of waffle and incompetence over thought, professionalism and expertise, for which tax payers and future generations will pay dearly.

With the record of how this Government is currently dealing with the crisis, I say bring in the IMF immediately. The draft legislation with its ‘long term market value’ incomprehension, its proposition to deal with  toxic loans on a per loan rolling basis, its lack of a cap or timescale for the project, its neglect of nationalisation as an option, its lack of clarity, detail and depth on clawback mechanisms.

Look at the previous post on how efficiently and professionally the Swedish people dealt with their banking crisis.

Frankly, this Government is an embarrassment! Its blinded by ideological self interest that ignores, in its frozen incompetence, the welfare of the tax payer. The Government should have acted last January, the messers are coming back from holidays in September .

Bring in the IMF!

It looks like they are about to make the biggest mess yet!

rgds

Colm

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