Friday, August 28, 2009

Preliminary Comments on NAMA

The setting up of NAMA (National Asset Management Agency) here in Ireland is rightly achieving a great deal of attention at present from politicians, economists and the public at large.

It is truly a massive undertaking proposing to transfer to the agency some 90 billion euro of bank loans made to developers amidst the mania of the Celtic Tiger boom, thereby creating perhaps the largest property company in the world.

As the result of so many bad loans the banking system was in dire straits. So the government first rowed in to provide a guarantee to depositors, and then later went some way to recapitalising the banks.

However due to the extent of the crisis (with most loans now likely to realise considerably less than their book value) the Government has now set up this agency in a further dramatic step to restore banking confidence. So the agency intends to take these loans from the banks (a great deal of which are toxic) while promising to pay a sum for them which is likely to be considerably above any realistic estimate of their market value.

So it certainly looks like a good deal for the banks! Now in defence the government could say that this is vitally necessary so that the banking system becomes free again to issue credit as required. Also the reputation of the banking system abroad needs to be restored as it took a severe hammering during the recent financial crisis. And there is certainly truth to this argument with a great deal of the institutional investment coming from overseas in recent years!

However this only goes to show how capitalist economic considerations are far removed in reality from any real notion of economic justice.

The banking directors who profited greatly from their rash lending policies will not be punished in any meaningful fashion. At worst they have lost their positions and reputation but will continue to live in considerable financial comfort. If some leading bank official was to be successfully convicted for fraudulent behaviour it would at least send out a healthy signal, but I do not expect this to happen. Also there will be no action against those in the supervisory regime who failed so miserably to exercise any control over what was happening.

Likewise despite assurances to the contrary I expect the key developers, who literally owe billions to the banks, to continue be be treated with "kid gloves".

It is my belief that the market for property in Ireland is highly artificial at present thus making it nigh impossible to ascertain true market price.

Though property prices have fallen somewhat from their peak (in the case of houses about 30%), given the totally inflated prices they had reached during the boom they would need to fall considerably more before the market would truly bottom out. We have largely a limbo market at present where, in order to keep the prices at a high level, property is just not being sold. And the banks who have shown extreme reluctance to face up to the extent of their bad debt problem have effectively conspired with the largest developers to maintain this situation through granting a continuing moratorium on loan repayments.


But surely all this will change when NAMA takes control? Well, not really!

You see NAMA are likely to guarantee these loans at price, basing calculations on some notion of current market value, which is totally unrealistic. Therefore to avoid undue criticism later from taxpayers that they have simply sold out, they are likely to wait in many cases - just like the banks before - for market values to recover (whereby they could then hope to justify their initial decision).

Meanwhile the developers likewise will have a vested interest in property prices recovering before making repayments (thus minimising their losses) and can be counted on to use every trick in the book to plead inability to pay.
One unsavoury aspect of this whole scenario is that many of these developers have deliberately set up company structures so complex that no one will be able to ascertain in any case their true financial strength. To put it bluntly I expect that countless millions in profits will remain safely stashed away. So the privileged lifestyles of the best known developers are not likely to change in any appreciable manner and many will surely surface again in the next property cycle fronting new company vehicles.


If things go the way that I broadly expect, then there could be very strong pressure in a few years time to seek an artificial solution through a somewhat premature reflation of the whole property market. Just think about it! The public finances are likely to remain in a dire situation. Growing problems in the operation of NAMA will surface. Property prices will continue to drop with no realistic chance of recovery in the near future. Taxpayers will become ever more irate at having to finance massive losses at a time when their own living standards have dropped considerably.

The pressure could be then irresistible for the Government to artificially incentivise the market pleading that this is now timely with prices already having fallen considerably. At one fell swoop this would bring back the old Celtic tiger feeling with the promise of more jobs, improving public finances, growing consumer confidence etc. And with property prices once again on the rise, NAMA could properly get to work realising all those loans that they had guaranteed (and hopefully at prices not too far from what had been originally offered to the banks).

And if anyone were then to ask then about the longer term consequences of these actions a Government spokesman could perhaps use Keynes' famous quote for justification, that "in the long run we are all dead".

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