Wednesday 18 September 2019

No, minister: Nama can be dismantled!

Two simple steps are essentially all it would take to stop the flawed creation that is Nama, writes Peter Mathews

NAMA isn't fit for purpose. It's an albatross. It should be stopped. And it can be dismantled. There's no mystery. It's straightforward. It's not a question of trying to put the eggs in the omelette back into their shells!

Let's look at the facts. Early in 2009, Brian Lenihan commissioned a preferred economist, Peter Bacon, to examine the banking sector's bad loans, solvency and liquidity situations. The upshot of his three-month assignment, for a reputed €350,000 fee, was his Nama proposal. Mr Lenihan, the Department of Finance and Mr Bacon insisted there were no alternatives.

Nama was the worst choice the Government could have made. Incorrect €23bn estimated loan losses, as well as an €18bn error in a main assumption in Nama's business plan, were seriously misleading and therefore constituted a fraudulent basis for advancing the proposal.

We also learnt that an expert team from the International Monetary Fund (IMF) in March 2009 had advised Minister Lenihan that the Nama model would not achieve its main stated objectives of increasing liquidity and credit for businesses and households. Incredibly, the Government ignored this advice and announced the Nama proposal along with the Budget in April 2009. The IMF team had also advised that the loan losses in the banks would rise to €35bn -- not the €23bn mentioned in the Nama Bill.

So, what led our Government to adopt the flawed Nama proposal? The answer is twofold: first, a combination of crony-led, ignorant group-think, large egos and stubborn misplaced political pride; and second, the minister's probable lack of financial understanding that at least €60bn of approximately €100bn property bubble loans will never be recovered.

Today we continue to see rising losses on the banks' property loans. Therefore we know the banks need more capital than the €7.4bn for AIB and €3.65bn for BoI announced by the minister last March.

Anglo and Nationwide should both be wound down. Analysis proves this on a single page. Orderly wind-down for Anglo will take four to five years, for Nationwide three to four years. Extending Anglo's bail-out will result in €17bn further losses for the taxpayer. Such losses are unnecessary.

After Anglo and Nationwide are allowed to collapse, AIB and BoI should be temporarily nationalised.

As for Nama, it's obvious that it isn't doing what it was supposed to do. The Government just got it plain wrong. Its original business plan was flawed. Its recently revised business plan is also unsound.

Nama is a costly albatross. But it can be dismantled. Here's how:

Step 1: Simply reverse tranche one and tranche two loans transfers back into the banks at the transfer prices. This is simple book-keeping.

Step 2: Dismantle and re-deploy Nama personnel into recoveries divisions in the newly re-capitalised, temporarily nationalised banks. On this second point, it may come as a surprise to learn that Nama's accounting and IT systems (which maintain and record all transactions on borrowers' loans accounts, including balances, interest charge-ups, interest and loan repayments etc) are actually operated in the banks by dedicated Nama divisions within the banks!

In the majority of cases the banks' client/borrower correspondence files had also been transferred into the dedicated Nama divisions in the banks. Accordingly, following the reversal of Nama, these files will revert/return to the banks. In summary, the physical arrangements for the dismantling of Nama will only amount to re-naming the dedicated Nama divisions in the banks, instead calling them the property loans recovery division. These two simple steps are essentially all that would be involved.

The Nama bonds handed over to the banks can also be returned/reversed. That's just more book-keeping.

On an operations level, it's straightforward to reverse the Nama loans transfers. After reversal, the recovery of all the loans returned by Nama will be much faster when carried out by the originating banks rather than under Nama. Why? Because the banks will be more motivated than Nama to clean up their loan books as quickly as possible. Overall, this is the correct strategy.

It's also pivotal for accelerating downward corrections in asset prices and rental levels to revive market activity and to support sustainable economic recovery.

This is the kind of correction strategy for the banking sector alluded to by NTMA's retired CEO, Dr Michael Somers, last week at the McGill Summer School. He said that the banks should have been put into a "headlock" and robustly directed to clean up their loan portfolios themselves. He added that such an approach with the banks would have avoided enormous duplication of costly professional fees incurred by Nama in the recoveries process.

Peter Mathews is a consultant on banking and finance, and a media commentator

Sunday Independent

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