NAMA – what’s in an acronym?
21 April 2009
Alongside the budget the Government announced the creation of a National Asset Management Agency (NAMA) to buy up certain property related loans from the Irish banks, freeing them of the bad loans which have prevented them from lending to the rest of the economy and which in turn was lengthening and deepening the recession. The banks, cleansed of these bad loans, will then, in theory, lend to businesses and return the economy to something like normality.
The bad loans to be purchased by the State total about €80 billion to €90 billion and will be bought at a discount (reduced price) to this book value; figures ranging from 15% (Davy Stockbrokers) to 50 per cent have been mentioned. This means the State will pay, from €68 billion to €40 billion, a discount of €12 billion and €40 billion respectively on a loan total of €80 billion. The State will manage these loans over the life of the agency – 10 to 15 years - and try to recoup as much of their value as possible. It has been stated that if losses are subsequently incurred by the State the banks will be subject to a levy to pay for them.
While the State takes the risk up front, the banks are allowed to get rid of their bad loans and are given State bonds in return, on which they will earn interest, paid ultimately by the taxpayer, and on which they will be able to borrow cash from the European Central Bank (because the Irish State is part of the euro zone). If the discount is so great that the loans, say of €80 billion, are only bought with bonds worth €40 billion the difference will have to be written off, i.e. treated as a loss, by the banks, which means their capital reserves will be reduced (to put it simply) by this amount. Since banks have to have a certain level of capital, currently a minimum of 8% of assets (loans to customers etc.), the amounts written off might completely wipe out their current capital. If this is so then the Government has said it will put more money into the banks to recapitalise them. It has said that this will be in the form of ordinary shares, which confer more direct control, rather than the existing Government funds to be put into the two major banks of €3.5 billion each. These investments are in the form of preference shares which take precedence in terms of any payment of dividends - there isn’t going to be any - but which can be bought out by the existing private owners so that they resume complete control again.
A large discount on the loans would therefore mean the State does not overpay for the bad loans but means that it will have to more directly bail out the banks, but this time by perhaps taking overall control of them, while promising not to nationalise them outright and still leaving them partly in private ownership. Academic economists have debated the technicalities of all this and many have viewed the NAMA scheme as a bad one, recommending outright nationalisation of the banks instead. They recommend that they should then be cleaned up and when ready sold back to the private sector, privatised again once the State has sorted them out.
The Government has said this is not a bail out for the banks but as we have noticed before – telling the truth has not been a feature of this Government’s handling of the economic crisis they played no little part in encouraging. It is very obviously a bail out of the banks. The whole purpose of it is to make the banks healthy again. This can be achieved only by making them profitable and removing that which has reduced them to effective bankruptcy – the bad debts to property developers and speculators. Once we know this purpose the details, including the many missing ones, are more easily understood.
These missing details are not inconsequential: like is it €80 billion or €90 billion? Or is €10 billion (the effect of two of the recent budgets) not important any more? How will the State pay for them? How will it afford it? What price will be paid for the bad loans? This latter one has been the central question asked in the media. How much will the State pay for the rotten loans? The bankers’ friends in the stockbrokers were quick off the mark by suggesting 15%, but if this turned out to be the average figure the whole exercise would constitute the greatest rip off since, well, the last one.
Let us just consider that commercial property development land may fall by between 50% and 70%; while commercial property values may fall by up to 70% and residential property land in Dublin and other cities may fall in price by 70%, and in regional towns by 90%! (‘Irish Times’ 20/03/09) Comparisons could then be made with the mass privatisations in Russia or Barack Obama’s latest gift to Wall Street through the asset purchase plan of his Treasury Secretary Timothy Geithner. In fact in relative terms the Irish bail out would be much, much bigger.
The ‘Financial Times’ (09/04/09) called the whole exercise ‘colossal’ and ‘one of the biggest recapitalisation plans in the world compared to its size.’ It also said that ‘there is no point to a bad bank [NAMA] that absorbs no risk.’ It was therefore saying that there is no point taking bad loans off the banks if you only give them what they are worth because this defeats the purpose of making them better off. Equally there is no point talking about bank levies afterwards if, or rather when, the loans create losses for the State. This will only prevent private sector investors from getting involved with the banks and returning them to the privately owned operations that the Government seeks. Unless of course the banks simply pass on the cost of the levies to their customers.
The cardinal objective of the Government is therefore to save the banks and do this without nationalising them. It makes no sense therefore to introduce this scheme if it simply leads to the State taking overall control, which they could do much more simply and directly by nationalising them. A big discount on the loans, in other words paying a low price – what they are no doubt worth – would lead to the banks existing capital being written off, and as we know €7 billion of this capital has already been promised from the State. Why would it then want to so quickly write it off? This shows how tightly the Government has linked the interests of the bankers and the State.
Much of the commentary has therefore been on how all this will work. The technicalities and complications are no doubt large. How are bad loans shared between banks to be dealt with, particularly if these involve non-Irish banks? How will foreign assets financed in Ireland be dealt with? In particular there is a real fear in certain establishment and international circles that it will end up another Fianna Fail exercise in corruption, unprecedented and unparalleled because of its size and because it will find the State in charge of property development and in an extremely close relationship with the developers and speculators. In fact the same relationship that caused the Irish crisis to be so severe in the first place.
Already we are hearing that we must all understand that when the State agency NAMA manages the rotten developer loans there is no point in pushing the similarly rotten developers into premature bankruptcy, so preventing the taxpayers from getting their money back. Likewise in managing the assets built, or half-built, with the loans, there is no one better able to understand or mange them than the property developers! Again all in the interests of the taxpayer of course.
A partnership in NAMA with private sector investors, including the original developers, could very easily be done off-balance sheet so that the State magically spirits away the problem from its books while allowing whatever money that can be made be made by the private sector. Again a repeat of the financial shenanigans that got us here in the first place.
The establishment is acutely aware that what is involved here is the transfer of an enormous amount of wealth from the working class to those who are identified with creating the problem – the bankers most obviously and also potentially the developers. The whole approach of the Fianna Fail-Green Government has been to do everything to assist these people and the holders of the banks debt, including the international bond holders of the banks who appear as the group most to gain from this whole exercise.
There has been speculation however that the sheer scale of the attack on workers’ living standards will produce social unrest and the bank UBS has openly warned of this danger.
In fact there is no way this can be avoided. In principle the NAMA scheme is designed to bail out the banks and their bond holders. It has simply been impossible to save the shareholders as the value of the banks has plummeted with some of the shareholders selling up and profiting at the expense of those left. It is scarcely believable that the State will pursue the delinquent loan developers and their other hidden assets in order to repay the taxpayer – we have already seen the Government quickly row back on the proposal in Anglo-Irish Bank to prevent these people withdrawing deposits when they also owe the nationalised bank much larger sums of money. Speculation is rife that these developers can go North to avail of much more lenient bankruptcy laws which will allow them some additional room to manoeuvre out of their financial obligations.
Now we are informed that there will be ‘negotiations’ between banks and Government over the value assigned to the bad loans when all the cards are with the Government, which does not have to negotiate over anything. But this has been true right from the start and the Government has bent over backwards to accommodate the interests of the bankers. As this article was being finished it was reported that despite all assurances to the contrary, from the banks, regulator, Government and those nice accountants PWC, Allied Irish Bank will need more capital: another €1.5 billion on top of the €3.5 billion to be given by the State.
Apparently it will garner this extra capital by selling its stakes in two foreign banks it owns and since these are already counted as assets on AIB’s balance sheet the cash received would not actually increase its asset base. Except that it has been noted that this wondrous feat will be achieved by an accounting trick that involves reversing a liability – negative goodwill – which was incurred when these assets were bought, and thus creating an asset. What is important is not perhaps the accounting trick but the other questions raised by this proposal. Why the urgent need for cash? Is AIB on the way to being bust quite soon? Why create an extra asset of €1.5 billion when every informed person knows the bank will have bad debts many times this that will have to be written off? Maybe does this show there is no intention of NAMA paying anything approaching a fair price and that the taxpayer is indeed about to be ripped off big time?
We know corruption will lie at the heart of this process not just because of the corrupt rationale for the whole scheme – the poorest pay to bail out the richest, but also because the whole process has been built on lies – that, for example, this is not a bank bail out! A process built on desperation, greed and lies, mixed with the history of cover-up – we still haven’t seen the PWC report on the banks for example – will be tempered by only one thing. Can the State afford the whole exercise?
The national debt will double as a result of this scheme. One way to reduce has been the suggestion that private investors be invited to participate not only in managing the loans but in buying them. While this might lower the up-front cost it will only lead to the least distressed loans being taken by these private sector investors and the cost to the State increasing in the long run.
There is little assurance that this will work, either in the sense that it will lead to anything like a return to normal bank lending that will reinvigorate the economy, regardless of what might be considered ‘normal’, or in the sense that it will actually be introduced. In the latter case an argument can be made that the delay of perhaps at least a year in getting NAMA properly set up simply shows the Government is putting off hard decisions and hoping something will turn up to save it. In the former case the banks will have shrunken balance sheets because of the write down in the value of their loan book. They will suffer increasing bad debts as a result of the effects of the recession on the rest of their customer base. Their priority will be to spend what money they have getting rid of Government ownership. And we have already seen that they weren’t particularly interested in funding a productive economy even when conditions were good. They were much happier putting their money into property deals abroad. Why would they suddenly want to lend to indigenous firms in the midst of an almost unprecedented recession?
The Government’s much trumpeted €500 million venture capital fund, announced late last year, to be partnered with US venture capitalists, has had precisely zero partners to work with. Such is international confidence in the economy of the Irish State. Only by minimising the discount on the price they pay for the bad loans and signalling the irrelevance, or outright scrapping, of the bank levy will any international investor want to invest in Irish banks. The question arises how they could make money except by screwing their ordinary customers from a strengthened quasi-monopoly position.
There is therefore more chance of a second round of banking crisis as a result of bad debts on non-property related loans as there is of a surge of investment and a return to ‘normality.’ It should be recalled that this is the Government’s fourth major ‘solution’, following the bank guarantee; recapitalisation plus the banks themselves raising money; then more recapitalisation by the State only and nationalisation of Anglo-Irish; and this is without counting the latest news on AIB or even having claimed to have sorted out the smaller financial institutions.
Again the question is asked why take this route to saving the banks? We have noted that it is partly a result of Fianna Fail’s close relationship with the property developers and speculators and also with the bankers. Both types of businesses play a disproportionate role in the economy and the direction of causation runs in both these directions.
The other, more important, answer we have given is that the weak and subsidiary character of the State, its subordinate character to imperialism, means that it feels compelled to bend over backwards to assure this imperialism of its good intentions. In the long run its future, one of dependence on outside investment, is dependent on this. In the short term it is dependent on international finance on bailing it out. The European Union through the European Central Bank would have to recognise the bonds issued to pay for the bad loans of the banks and the international money market will have to want to fund the burgeoning State debt. This is why, as we have noted, everything in this plan seems subordinated to protecting the interest of the bond holders of the banks, many of whom are foreign.
Many of these capitalists however are giving voice to their concerns that the Irish State cannot afford its chosen strategy. Yes they want austerity budgets to reduce the budget deficit and to minimise the State debt, but they worry whether it can be afforded. All while they impose higher charges for lending to the Irish State! Since it is the working class who will overwhelmingly pay for the crisis the question is not a technical economic one but a political one. Can the costs of this economic disaster be successfully imposed on workers? One ‘Financial Times’ columnist has already wondered whether the economic crisis might go on to be resolved but only at the cost of a more important political crisis.
The crisis is therefore ultimately a political one – will the working class pay for the mess? If it does then the recession might be deep and long and the State debt might get enormous but the crisis will pass, even if there will be no return to anything like the Celtic Tiger. The ‘return to competitiveness’ that the State, bosses and also trade union leaders want will mean a huge reduction in living standards which are already forecast to fall 10% this year on top of last year’s reduction.
Workers must see beyond the lies, beyond
the rhetoric and beyond the technicalities espoused by the experts who
failed to see the whole mess coming. They will look for an alternative
and it is the duty of socialists to provide a socialist one, the only one
which really is a genuine alternative.