Country's future staked on most volatile of markets

 

OPINION:The taxpayer is picking up the cost of the political ignorance that has created the monster that is Nama

MARCH 30th, 2010, marks the most important day in the history of the Republic. On that day, we saw the Dáil approve the Government’s plans for the banking system.

To put this in context, the sums involved between recapitalisation of the banks, Nama etc are close to €100 billion – three or more years of tax revenue.

Imagine a standard pallet. Stack it 6ft high with €50 bills. It would take over 1,600 such pallets on 33 articulated lorries full of cash to pay for the package voted yesterday.

It is deeply worrying to realise that the Government majority consists of whipped lobby fodder who in the main do not know a subordinated bond from a Smartie and yet troop sheep-like through the gates, letting the taxpayer pick up the cost of their ignorance.

Churchill had a famous saying about something being “the beginning of the end”. Alas, despite the cheery and unwarranted optimism of Cowen and Lenihan on Tuesday, this package represents in my view merely a holding operation.

Having flagged this as the “big bang” what we got was more a damp squib, hard though that may seem to believe.

It is beyond stunning that we still do not know the true losses in the banks, with the data given yesterday the best estimates to date.

After 18 months the State still is not 100 per cent sure what exactly it covered on the infamous night of September 29th, 2008, when the taxpayer was used to plug the emergent gap in the banking system.

There has been a tsunami of ink covering much of the Nama debacle and debate. I want to concentrate on three issues: the manner in which Nama and the recapitalisation will be financed; the staging of the loan transfers to Nama, and the demented logic of AIB in its efforts to avoid the inevitable.

Anglo, the bank that ate Ireland, deserves a separate discussion.

Hidden in the blizzard of paperwork on Tuesday were details of how Nama will finance the €50 billion or so of Nama bonds. Again the extraordinary dilatoriness of the project, the lack of a sense of urgency that can only come from living in a bubble, is evident here.

A year on from the proposal to establish the world’s largest distressed property fund and we only now know how it is proposed to be financed.

It seems that the “buy now, work out how to pay later” virus of the bubble years is rampant in Nama and the Department of Finance.

The other virus, that of funding short to buy long, the very tactic that brought down Lehmans, is also still rampant.

Not content with exposing the taxpayer to the risk (certainty, in my view) that the Nama loans will be overpaid for and will underperform, the National Treasury Management Agency (NTMA), the Department of Finance and the Government have exposed the taxpayer to massive refinancing and interest rate risk.

In a world of tight credit, the taxpayer now has to float €50 billion each and every year. The Government has staked the future of the country on the mercy of the most volatile part of the financial markets, hoping that they will in turn take pity on us.

They won’t – they will extract interest payments from Nama that will, as certain as the sun rises, increase over time.

Funding at the short end of the maturity spectrum will allow the proponents for Nama to claim that it is cheap. It is apparent that neither the NTMA, Nama, the Department of Finance advisers, the Minister nor the Cabinet are aware that the yield curve, which indicates the future cost of funds, is upward sloping; if they do they do not seem to care.

We are funding Nama at the short end of the maturity spectrum to purchase long-term illiquid assets. This is folly, needless folly.

There is also reason to be concerned about the tranches of loans transferred.

The first tranche of loans to be transferred is being lauded for being done so at a significant (47 per cent) discount. These loans account for 20 per cent of the total to be transferred. This discount, we are told, indicates the seriousness with which Nama is taking its loan-by-loan valuation.

However, let’s recall that we are in an environment where land and commercial property portfolios have fallen by 50-90 per cent. That Nama is overpaying massively is a given.

More of concern, however, is that this is the first tranche of loans, and they are the largest most toxic loans for which legal title and paperwork is available. There is no guarantee that lurking in the banks’ balance sheets there are not more toxic and more impaired loans for which poor title exists.

And then there is the loan set that is personally guaranteed. If these remain with the banks they weaken them, negating the value of Nama. If Nama takes them over, at a zero cost, the banks require further recapitalisation from the ensuing losses. If Nama pays more, they run the certainty that the overpayment is greater.

All this beggars belief that the regulators could have allowed a situation to evolve whereby banks were lending hundreds of millions without adequate legal safeguards.

Finally, there is a very strange dichotomy at work with regards to the proposed treatment of AIB versus Anglo.

Anglo is a rotting carcass of a bank with no hope of survival. It is getting €23 billion and more to come of State aid for reasons that passeth all understanding. It will continue to haemorrhage money, taxpayers’ money, for decades if it is not put out of misery.

AIB, by contrast, is a bank that is seriously ill. It requires massive recapitalisation. The Government, faced with what is ultimately a well-diversified financial institution, has determined that it should be forced to sell any and all productive elements – its overseas operations – and to retain the ailing Irish elements. The money raised will then reduce the amount that the State has to put in.

The ideological bias against State ownership of the banks, even if needed and temporary, is still at work. The Government, faced with AIB, acts like a doctor who, when faced with a patient, cuts off the healthy flesh to allow the gangrenous limb gain more time.

The treatment of the two banks could not be in starker contrast. There is no economic rationale for keeping Anglo afloat, which must imply a political desire to see it not go into liquidation and its secrets revealed.

Brian Lucey is associate professor in finance in the school of business at Trinity College, Dublin

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