NAMA needs tweaking or it could destroy us
Finance Minister Brian Lenihan, pictured with Brendan McDonagh, interim managing director of NAMA, who have the task of digging the banks out of the huge hole they created for themselves
Friday August 28 2009
The proposal, as it stands, will result in the creation of an opaque and ungovernable structure
Government proponents in the debate on Nama present the public with no alternative but to either reject the entire Nama legislation or to accept it as published. This tactic attempts to deflect the debate away from the main shortcomings of the current proposal.
There is, however, another option -- an option of fixing Nama legislation to minimise the expected losses to taxpayers and bringing about transparency and accountability to its operations. Let's call it Nama Trust.
Under the present plans, once all receipts from Nama are counted, taxpayers will face the expected losses of at least €20bn or more. This number is based on the only available comprehensive estimates prepared jointly by myself and Professor Brian Lucey and confirmed by a number of Irish and foreign analysts.
However, even if Nama purchases the loans at a 30-40pc discount, additional funds will be needed to recapitalise the banks. This will imply nationalisation of the Irish banking system. The Government, in effect, is boxing itself into the same corner it is trying to avoid.
Under the current Nama proposal all the gains are made by the banks' bondholders and shareholders. The trust would start by putting taxpayers in front of other beneficiaries. To do so, we first need to force the banks to estimate the full extent of current losses on the loans, just as the Swedish government did in their banking crisis 19 years ago. Following that, banks' shareholders and bondholders should be required to take a hit in exchange for some shares in the trust.
More capital should be supplied by new private investors sourced with the help of the Government.
Only after the private avenues for recapitalisation are exhausted, should Irish taxpayers provide capital to the banks in exchange for equity. These shares, along with purchased loans, will be owned by taxpayers and held in a public trust until a time when it can dispose of these assets in an orderly fashion. All upside from such disposals, net of costs to the Exchequer from running Nama Trust should be immediately disbursed to taxpayers registered as tax compliant on the date of Nama creation. Thus, no tax exile will benefit from these shares.
Most crucially, the trust will not be a government-owned organisation, so the Irish banks will remain private enterprises, removing all downsides of nationalisation.
There will be a supervisory board appointed to every recapitalised bank which will include independent directors charged with guarding taxpayers' interests. In contrast to the current Nama proposal, the trust risk, credit and audit committees will include independent experts who cannot be employees of the State or any other parties to this undertaking. The trust board must include a significant presence of truly independent directors. The current legislative proposal simply ignores such a need to protect taxpayers' interest.
Nama must be explicitly prohibited from acting as a vehicle for future borrowings by the Exchequer -- something that will be hard to resist for any finance minister strapped for cash.
The trust should be restricted in issuing new debt to finance completion of development projects without an explicit approval of the all-parties Oireachtas committee charged with overseeing its operations. Such an approval can be made only after an explicit recommendation from the Nama credit and risk committees based on economic, environmental and planning feasibility studies that must be published for the purpose of public consultation.
To ensure real accountability, Nama Trust must issue public quarterly and annual reports containing all information concerning the value of the assets held and detailing all losses that might have arisen in the interim period. The trust should disclose all potential conflicts of interest and general conditions of employment for staff, senior management and directors, while respecting personal data confidentiality. All Nama deliberations and decisions should be made public.
The trust can, in a market-respecting fashion, disburse all or a part of its shareholdings so as to maximise the return to taxpayers. This should be notified to the public after execution and Nama will then have 60 days to issue every shareholder a share of the sale proceeds net of operating costs and a special capital gains tax of 33pc.
In recapitalising the banks, Nama will have a right to pursue delinquent borrowers' collateralised property legally shielded from authorities or banks at any time after July 2008.
Banks participating in the trust will be required to impose strict caps on executive compensation and to set up new boards and committees with a mandatory requirement for taxpayers' representatives. These would be positions that could not be occupied by a present or past public employee or anyone who has worked in the Irish banking or development industry in the last seven years.
Lastly, to prevent any conflict of interest, the banks will be required to set up independent departments to manage Nama assets. These departments' performance will be benchmarked against overall bank performance to ensure that taxpayers are given full protection against the banks prioritising their loans ahead of those held by Nama Trust.
This is a basic set of proposals for fixing Nama to assure that the undertaking fully safeguards taxpayers' interests, while retaining private ownership of the banks -- the major objective of the Government and the EU authorities.
This proposal fully addresses the main concerns of the Irish government and the European authorities while creating a more transparent and accountable Nama. The alternative to Nama Trust, namely the government proposal, will result in the creation of an opaque and ungovernable structure that will risk destroying the very foundations of the economy it aims to protect.
Dr Constantin Gurdgiev is adjunct lecturer in finance at Trinity College, Dublin,and a blogger on www.trueeconomics. blogspot.com
- Constantin Gurdgiev
