Scope and role of NAMA
IRELAND’s National Assets Management Agency (NAMA) is being set up to buy the most dodgy loans to property developers’ on the balance sheets of Irish banks. The existence of these loans is said to be preventing the banks from lending to the authentic, productive segment of the economy and enabling that segment to stimulate economic recovery. They lent too much to too few property developers and speculators but it acted as steroids would for bankers’ bonus enhancement. Many a good Sunday afternoon in the corporate boxes at Croke Park, Punchestown and the Curragh was enjoyed on the strength of it!
These loans are to be valued on the basis of a prescribed methodology, as defined in the Bill. Their valuation will be lower than that recorded in the balance sheet of the lending bank. Valuation is not to be determined by the inflated assumptions and price structure on which they loans were first approved. The assets which were provided as security for the loans will be valued on the basis of a price is realistically achievable in the medium to longer term in term. NAMA will be the largest property owner in the country and will have the bargaining power that goes with this status. This means that it should be able to choose when to put property on the market without depressing market prices unduly.
It is intended that the elimination of uncertainty and the cleaning up of bank balance sheets to more truly reflect the genuine underlying values of their assets and liabilities will revive our financial system and provide credit to businesses that need it and the interests of depositors will also be more secure.
The recent court case involving ACC Bank could put a spanner in works of NAMA if emulated. Not all banks will entertain the NAMA agenda as evidenced by the approach of its parent since 2002, the Dutch AAA rated Rabobank,
Can Irish banks be trusted?
All of the foregoing is predicated on the Government having no role in the commercial conduct of Irish banks.
The Government has rejected, at least for now, the option of nationalisation, arguing that it is better that the banks’ maintain a presence on the stock market and conduct themselves within the constraints and disciplines of that marketplace. But is this great act of faith not a bridge too far for the Irish banks? It sends a shiver through my spine that almost frightens the living daylights out of me to see these morons’ self-policing. Some of them are not fit to be the janitors removing cigarette butts from the latrines in the staff toilets, even with the protection of plastic gloves and goggles!
Were these banks not supposedly operating within the constraints and disciplines of the investment market for decades only to end up as the basket cases that they now are? The same disciplines that allowed them foster a nationwide culture of tax evasion (including personal tax evasion by themselves), offshore accounts for indigenous residents, scam charges on customer accounts and the cute-whore approach did not seem to conflict with their notion of discipline.
When one peruses the annual and interim reports of these awful banks it is abundantly clear that their all-consuming love affair with the property sector was intense, passionate, titivating and, of premier importance, bonus yielding. But have these dysfunctional gobshites any understanding of the needs and dynamics of authentic economy?
I frankly fear they do not and are incapable of learning and the more I see of their Windsor Tie Knots, their grimaces of injured innocence and the ugly oversized cuff-links perched on their starched white shirts, the less convinced I become.
As the nation awaits the debate of the NAMA Bill in the Oireachtas next month many of us are utterly mesmerised by the complexity and scale of the proposed NAMA project and the level of risk that it involves is beyond the comprehension of the average person. The value of the assets concerned, around €90 billion, is equivalent to the total personal expenditure of all the citizens of the State in an entire year in good times. It is three times the amount of tax the Revenue Commissioners will collect in 2009 and it is over 50% of the likely GDP in 2009.
Impact of lower credit ratings’
Many are being hurt by mortgage interest rate and cost increases. But the Government see these as reflecting commercial marker realities. They are careful not to spell out what these realities are. But could they have anything to do with degraded ratings and subversive transactions for which no one has been held accountable in a court of law?
The investigation by the Chartered Accountants Regulatory Board was being overseen until recently by the board Chairman who is also a director a bank being investigated. Can you imagine the bean-counters even allowing such a juxtaposition to materialise for the sake of their own credibility in society?
Apart from being clueless about the authentic economy our friends with the golden cuff links had no difficulty ramping up credit until it surpassed 200% of gross domestic product as though it were competing with Iceland in the financial services Olympics. The could do this because the vey same Government “had no role in the day-today commercial operation of the Irish Banks” – so they could do what they liked and to hell with the consequences, as long as it did not impair their personal remuneration.
NAMA does not have a mandate now to deal with dodgy residential loans. The individual mortgage bearer is not as ‘systemically important’ enough to matter as Anglo Irish Bank, a bank where no fewer than five chartered accountant ran they show.
The Alan Greenspan influence on Irish banking
Capitalism in the United States and elsewhere was energised by an approach proselytised by Alan Greenspan the Former Chairman of the US Federal Reserve Board (the Fed) to the effect that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring and managing their firms’ capital and risk positions. It was against this background that a plethora of so-called financial instruments, derivatives, sub-prime mortgages and securitised assets.
Greenspan was a passionate advocate of the free market. He was appointed to the chairmanship of the Fed by Ronald Reagan in August 1987 and held this position throughout the presidencies of George H Bush, Bill Clinton and George H W Bush until he was replaced by Ben Bernanke in 2006. The 1987 stock market crash coincidentally occurred the following October. Greenspan used the tools of monetary policy to guide the US economy.
This means controlling the availability and cost of money – so varying the interest rate was a central feature of the Fed’s tool kit throughout his tenure to particularly control the threat of inflation and maintain the value of the US $ at a satisfactory level on foreign exchange markets. The Republican Party, starting with Reagan, was a very strong advocate of reducing government influence and this meant that the Fed avoided the toolkit of fiscal stimulus – government borrowing, spending and taxation, to guide the economy. Their approach was to allow the market determine virtually everything.
The crucial difference between these newer financial products and traditional financial assets, such as stocks and shares, is that cash is directly exchanged for an asset concurrently in the case of a share purchase. Credit problems do not fester like rats in a sewer. The incidence of risk is minimised so the calculus of a bookmaker are not as necessary. Auditors can audit share transactions.
Derivatives and similar financial products are based on underlying contracts that can remain unsettled for very long periods. Some of the more complex derivatives can involve thousands of contracts and hundreds of contracting parties. Values are determined by an independent index – such as FX rates, interest rates, share prices etc. If there is an adverse movement in a relevant index of indices there may, or may not be a guarantee in place to trigger a payment.If there is no guarantee, or collateral underpinning a derivative their value is a function of the credit worthiness of the various connected parties but the apparent profits are recorded as earnings before money changes hands.
What happens in practice is that banks involved with derivatives and similar assets accumulate large quantities of ‘paper assets’, liabilities and counterclaims – an opaque cobweb of mutual dependence and dependence on third parties that are often unidentifiable. This minefield has yet to raise its head in the context of the assets and liabilities of Irish banks and building societies.
This meant that investors are not in a position to understand and analyse banks and financial institutions because these instruments can be underpinned by thousands of contracts and hundreds of counterparties. Their value and the value of their underlying financial assets can therefore be over or understated by a crippling variation, as was demonstrated by the collapse of Bear Sterns.
Limitations of transparency
Transparency is a much bandied word especially when it comes to averting future problems. Bu there is no reporting mechanism that can either define the risk of measure the value of a complex set of derivatives. They are not audited and they are not regulated.
I will be interested to observe the level of transparency that applied to NAMA. The nationalised Anglo Irish Bank has billions of € in impaired loans, including loans to directors and managers, but it is not possible to ascertain if these include the loans approved for the purchase of the Irish Glass Bottle site at Ringsend, Dublin to which the State’s Dublin Dockland Authority is a joint venture partner, notwithstanding that the current Government appointed Executive Chairman of Anglo Irish Bank was also the Government appointed Chairman of Dublin Docklands Development Authority in succession to Lar Bradshaw, formerly a director of Anglo Irish Bank. The current Chairman of Dublin Docklands Development Authority, Niamh Brennan, is an accomplished UCD professor and the leading academic advocate in Ireland of transparent, credible corporate governance! Will our patience ever be rewarded?