OPINION:The man asking for trust on Nama is the same man who said the property market was sound, writes RICHARD BRUTON
‘THE GOVERNMENT has to write whatever cheques are necessary in the interest of maintaining financial stability.’
This quote, from our Taoiseach just over a month ago, (July 14th on Newstalk Radio) neatly sums up the concerns Fine Gael have with Fianna Fáil’s insistence that the National Asset Management Agency is the only way to fix our banking system. The banks and the developers come first for Fianna Fáil, the taxpayer a distant second. But we’ve been here before. Fianna Fáil knows best. Any criticism is unpatriotic. In the recent past it was even wondered aloud by Bertie Ahern why such critics of Fianna Fáil didn’t just commit suicide.
This is the type of bombast that allowed Fianna Fáil to implement reckless, economically illiterate and politically motivated policies that succeeded in crippling our economy. It’s the type of approach that insisted the housing market was built on “sound foundations” as Brian Cowen said before the general election. And it was the type of approach that backed Anglo Irish Bank to the hilt. And it is now the type of approach that is saying, trust us, we know best, Nama is the only way to go. Well I don’t believe that. And I don’t think we need another reckless and economically illiterate policy from Mr Cowen and Mr Lenihan.
Our main concern about Nama, reinforced by 46 independent economists, is that it will pay too much for the €90 billion or so distressed developer loans to be bought from the banks. While this would be good for the banks’ investors, it could have devastating consequences for our public finances over the next decade, and result in greater tax hikes and service cuts.
The Government has tried to justify overpayment to banks on the basis of a very questionable concept of “long-term economic value”. But this is impossible to quantify in practice. The crashes in other countries like Japan and Finland are a cautionary tale for those who believe that prices will inevitably rebound from current prices in the short-to medium-term.
Five months ago Fine Gael offered a two-track alternative to Nama.
Under track one, we propose, as a temporary measure, to improve credit availability for struggling businesses and households by the establishment a wholesale “good bank”, or national recovery bank, with initial investment from the State and further funding from the ECB and markets, using a model that is well established in EU countries. Enforcing the lending commitments already made by AIB and Bank of Ireland in return for the €7 billion given to them in new capital would be another priority.
In parallel, under track two, the banks would be given until the end of the guarantee period in September 2010 to pass a rigorous “stress test” to show that they had repaired their own balance sheets by selling assets (such as foreign subsidiaries), raising more deposits and negotiating with their investors to write off their losses.
In the event that the banks cannot pass such a stress test by the end of the guarantee period, Fine Gael’s proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy asset management companies owned largely by the shareholders and other classes of risk investors. Deposits, other short-term liabilities, personal loans, mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern “clean bank”, initially owned and guaranteed by the taxpayer.
These new “clean banks” would be free of toxic developer loans and fully open to resume lending to small businesses and households.
We are confident that this break-up procedure would never prove necessary for most and perhaps all of the banks, as they and their investors would have every incentive to avoid it.
All the major banks have already announced plans to buy back debt from their bondholders at a discount in a way that pushes some of the banks’ losses onto those that funded the reckless lending.
These types of negotiated “debt buy-backs” and debt-to-equity conversions would accelerate dramatically under our policy and at greatly discounted prices.
The big advantage of this model over the current Nama proposal is that the risks associated with working out distressed developer-related loans would remain with those professional bankers and investors that funded them.
Rather than engaging constructively in debate on the alternatives to Nama, Fianna Fáil has instead chosen to invent an economic bogeyman to try and hysterically caricature our policy as the Government reneging on its own debt. We are, of course, making no such proposal. When the blanket guarantee expires, bank liabilities revert to being purely private, not sovereign, obligations.
It is accepted international practice for risk investors in the banks, including some classes of bond-holders, such as owners of subordinated debt, to absorb loan-related losses ahead of taxpayers.
Putting banks into managed administration, where depositors are protected and losses are absorbed by investors, including some bond-holders, has been a common feature of recent banking policy in the US (Washington Mutual) and Britain (Bradford and Bingley).This is, after all, the nature of capitalism.
Until confidence has been restored and the banks returned to health, funding for the banks would be secured by targeting an extension of the guarantee to all deposits, other short-term liabilities and new “term funding”. Only those long-term risk investors like shareholders and subordinated bonds that remain locked into the banks at the end of the guarantee period would lose the guarantee and be exposed to losses.
I am not pretending that any solution to the banking crisis will not involve pain for the Irish taxpayer. But by allowing some investors and speculators to walk away scot-free from this crisis, the Government could be exposing the taxpayer to additional, unnecessary costs of up to €10 billion.
This “write any cheques” approach has already damaged perceptions of Ireland’s creditworthiness and provides terrible incentives for banks to engage in more bouts of reckless risk-taking.
Fine Gael’s approach is based on a set of core principles: protecting the taxpayer; minimising and ensuring a fair distribution of the losses; and improving credit availability for struggling businesses and families.
These principles underpinned our written submission to the Minister on how to transform Nama.
It is not a dogmatic approach, it is one open to genuine debate and discussion. For the sake of the taxpayer I hope he embraces this genuine offer for real engagement.
Richard Bruton is Fine Gael finance spokesman