Arguments against Nama alarmist and unbalanced


OPINION:I MUST be unfortunate in having missed the balanced debate surrounding the National Asset Management Agency. Either that or it has indeed been incredibly one-sided. One can understand the concerns and as long as the facts are used to present criticisms of Nama in a balanced manner, then one can have little complaint, writes RORY GILLEN

It is in that regard that I found Fintan O’Toole’s recent article on Nama ( Gambling all for a prize not worth winning, Opinion and Analysis, August 25th) disappointingly cynical and drawing conclusions on questionable facts. The Irish taxpayer deserves better. In response, I would make the following points:

1. Ireland is not “now” betting the house on Nama;

2. It is far too simplistic to say that the Government is planning to pay “way” over the odds for assets being transferred to Nama; and

3. Arguing that replacement cost is a sensible way to value homes is at odds with the fundamentals that have actually determined house prices in Ireland over the past several decades.

For right or wrong, in the midst of a global banking crisis, the Government guaranteed, for two years, the funding sources of the Irish banking system in September 2008. Sebastian Orsi of Merrion Stockbrokers rightly points out that Irish taxpayers also benefited from the Government guarantee at that time as their deposits were then secured.

The direct implication of that guarantee was that had the funding sources for the Irish banking system come under further subsequent pressure, the Government would then have had no choice but to nationalise the banks. Nationalisation would, in effect, have seen the Government and the taxpayer owning all the banking assets as well as the liabilities. Any subsequent decline in the value of those assets was, therefore, a risk the taxpayer already had. Thus Ireland is not “now” betting the house on Nama – that bet was largely made in September 2008.

In yesterday’s Irish Times, 46 economists made the point, among others, that banking shareholders, and, perhaps, some bond holders, should shoulder further losses before the Irish taxpayer is hit.

There is merit to the argument that shareholders should be wiped out first. But it is hardly a transforming solution from the taxpayers’ viewpoint and claims for nationalisation fail to make this point.

At today’s prices, the combined market value of Allied Irish Banks and Bank of Ireland is €4 billion, an amount that would make only a modest dent in the losses likely on the €90 billion of assets being transferred to Nama. And upon nationalisation, the Government, in effect the taxpayer, would have to provide further capital to the banks. The Government is rightly trying to avoid that. The related argument that bond holders should also be scalped is, in my view, a very short-sighted one. The cost of Ireland’s debt would most certainly increase, further hitting the majority of mortgage holders and businesses.

In the eyes of the international community, it would also link us to such bedfellows as Argentina, Russia and Iceland. I, and surely our descendents, would rather not be stuck with that particular stigma.

There is no doubt that it is difficult to place a value on development land being transferred to Nama. And I have had no Einstein moment on the issue myself. But, in my view, pointing to distressed sale prices due to the bankruptcy of property developers such as Liam Carroll to quantify possible losses on Nama’s assets is deceptive, possibly wrong and certainly fails to take into account a critical part in the jigsaw. It was, after all, the actions of the Government itself that resulted in the near complete absence of overseas buyers for Irish property assets.

How can you value illiquid assets when the Government itself has seen off the likely acquirers of Irish property? Through its reckless management of the country’s finances, which has resulted in a disastrous budget deficit, the Government has played its part in ensuring Ireland Inc is off the overseas buyers list.

So the part problem maker morphs into the buyer of last resort and gets to determine the price as well. Force the banks to sell their illiquid assets to the Government but scare away the natural potential, the buyers first. Bring in the monopolies commission!

And I am not persuaded, and nor should the taxpayer be, by the alarmist arguments that Nama should buy banking assets at the price set by the marginal seller.

In March 2009, marginal sellers sold shares in Norkom, a small and highly successful Irish security software developer, at under 40 cents a share. This represented a price near the net cash value sitting on Norkom’s balance sheet at that time. No rational businessman would have valued Norkom, in totality, using that 40 cents a share price. That is not to say that Nama is not going to overpay. But the arguments presented, and not just in O’Toole’s article, are alarmist and unbalanced.

Fundamental to the valuation of development land is the average house price. In Ireland, at least, the average house price since 1970 has been determined by the interplay between average earnings and interest rates.

For the Irish, the purchase of a house has always been a lifestyle decision. Hence, the bubble era aside, we pay what we can afford to pay relative to our earnings and other affordability measures such as interest rates. To suggest that replacement cost determines house prices is mischievous at best.

There is no ideal solution to dealing with the banking crisis but deal with it we must to return the banks to a position where they can lend again. And the fact remains that Nama will buy its assets at a discount.

Furthermore, it is highly likely that the banks will end up at least partially funding any subsequent Nama losses through a levy even if that is not enshrined in the Nama legislation.

Rory Gillen is course director of the investment training company ILTB ( He is a chartered accountant and former fund manager and was a founding director of Merrion Capital

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