Friday, September 4, 2009

Asset agency must be accountable and transparent

After months of dithering, Government finally acted to begin reconstructing the Irish banking system with its planned take over of some of Irish banks most toxic loans. Without doing so the economy stood no chance of recovery.

Ever since last September getting banks back to reasonable health was an absolute requirement of any state facing deflationary meltdown. The creation of the National Asset Management Agency or NAMA, is an EU first, proclaiming as it does the states “Banama Republic” status – a combination of sovereign rating and bad bank.

The numbers keep getting bigger. €90bn with its toxic mess of €29bn are headline figures that hide a complexity that will cost the state and tax payer billions no matter how sugar coated the bitter pill is. This bitter pill amounts to buying toxic assets, probably for more than they are worth, as paying fair value will destabilise the banks.

To hedge against overpayment, Finance Minister Brian Lenihan says he will “levy” the banks with a recovery fee if NAMA falls short on breaking even. The true cost will not be known for years and any “levy” will be carefully constructed to fit a different state v banker relationship.

It also seems the door is being left open to nationalisation should a bank not survive NAMA’s haircut pricing mechanism as it mandatorily hoovers up property loans. This is probably safety cover, as the full due diligence on loans to be bought will not be done for some time yet.

For now Government has no intention of taking the next logical step which should be nationalisation. Instead it hopes the banks will feel liberated to get credit flowing once again rather than acting to save their shareholder and bond holders skins.

Extreme risk aversion is a documented feature of private banking behaviour in banking crisis as they are susceptible to a paralyzing fear that new loans will put their capital at risk.

Furthermore because future bank profits will be only be generated as banks have been freed from their toxic assets, their shareholders gain at the expense of the taxpayer who foots the bill for swallowing the bitter pill. Government’s structuring of the deal does not allow for a tax payer dividend unless that is banks are temporarily nationalised which is what happened in Sweden.

A recent IMF report on “NAMA” type approaches said “Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP on average, and can be as high as 55.1 percent of GDP. Recoveries of fiscal outlays vary widely as well, with the average recovery rate reaching 18 percent of gross fiscal costs”

But this may only the first NAMA scheme, as the scale of wider distressed debt problems becomes apparent in consumer mortgages and wider business sectors.

The NAMA deal will swap government bonds for bad loans, allowing banks to deleverage and bolster capital levels depending on what price NAMA extracts. Some say the price will be carefully calculated to maintain capital at legal regulatory requirements. Whatever the outcome after banks have realised their property loan write downs, they face the reality of increasing consumer and business loan defaults.

All eyes are on the price to be paid for toxic loan assets, details it seems will not be divulged for “commercial reasons”. In short the tax payer is being asked to “trust us we know what we are doing” despite a recent history of doing exactly the opposite.

NAMA will become a powerful manipulative force in the property market for years to come as it takes ownership of vast portfolios of land and property. Clear accountable and transparent governance will be required along with proper public oversight. The public should not accept bland assurances of governmental and regulator system whose opacity and failure to regulate led to the property bubble.

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