Sins of the Father (27 page)

The creation of the National Assets Management Agency (NAMA) in 2009, in the face of almost unanimous opposition across the country, brought home to the educated, conservative, middle classes that, in spite of what they had been telling themselves for years, their opinion, quite frankly, did not matter. The Irish middle classes honestly believed that the country’s housing market had been driven by a property-owning gene unique to the Celts, one forged after the famine and shaped like a semi-detached in suburbia, instead of seeing it for what it was: a speculative bubble fuelled by deregulated finance and Section 23-induced tax havens. The myths about our history, culture and economic success, to which the middle classes had clung for so long, were now being eroded. And the middle classes were not happy.

An Taoiseach Brian Cowen, 4 February 2009.

On 18 February 2009, the National Treasury Management Agency (NTMA) appointed the economist Dr Peter Bacon as a special advisor reporting directly to the Minister for Finance. He was given a three-month contract and was hired in order to ‘enhance the agency’s team during the recapitalisation process’.
¹⁰⁰
His remit was to ‘access the possibility of creating a “bad bank” or risk insurance scheme to take so-called toxic debts off the banks’ balance sheets in a bid to free up new lending’.
¹⁰¹

The previous week, the Minister for Finance had announced a €7 billion recapitalisation of AIB and Bank of Ireland. He stressed that the government had no desire to take control of the banks, nor would it hold ordinary shares. ‘The Irish financial institutions have little or no exposure to the sort of complex financial instruments which are weighing on the balance sheets of many banks internationally,’ he said. ‘However, Irish institutions have engaged in lending for land and property development, which exposes them to specific risk at a time of falling property prices and difficult economic conditions.’
¹⁰²
(Lenihan neglected to mention that the complex financial instruments he talked about had allowed Irish banks to leverage their capital to the type of levels to which they were now exposed, ensuring that capitalisation was now a core issue.) He said that the government was prepared to discuss schemes for assessing and eliminating such risk, and Dr Bacon’s appointment was seen as part of this process.

The news that the government was contemplating a ‘bad bank’ for toxic assets drew the attention of Karl Whelan. In an opinion piece for
The Irish Times
, published on 27 February, he said that the ‘removal of toxic assets is not the key issue: banks could remove these assets themselves by simply writing down these loans to zero’. Instead, Whelan explained, ‘The relevant question is: what price does the government pay for these assets?’ The government, and its advocates in the press, claimed that the ‘bad bank’ scenario was a tried and tested way of dealing with banking crises. However, the proposals talked about by the Department of Finance and NTMA differed in crucial ways from what had gone before. Whelan explained:

Previous bad banks were state asset management companies that worked to obtain the best sales price for assets that governments inherited from insolvent banks that had been nationalised. The current proposal, which involves paying over the odds for assets to keep insolvent banks in private hands, has not been tried before.

The government wanted to recapitalise the banks by paying more for assets than they were worth. Not only that, it was entirely feasible ‘to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place’. Whelan concluded that the bad bank and risk insurance proposals were ‘unlikely to produce a clean solution to the problem of undercapitalised banks’.

The minister, however, wanted a solution which was unique to Ireland, one that would involve ‘moving impaired assets – property loans and the properties securing them – into a separate property company … which could be capitalised and attract investment in due course’.
¹⁰³
It was in order to explore the practicalities of this idea – a toxic property company rather than a bad bank – that the Minister hired Dr Bacon. On 8 April 2009, a press conference took place in Dublin, at which the result of these efforts, NAMA, was presented to the people. The minister said that although NAMA would not be a bank, it would be managed like a bank, ensuring that ‘optiminal value for money is obtained for the taxpayer’. It would purchase property portfolios from the banks at a discount, and these portfolios would consist of both good and bad loans. At this early stage it was estimated that NAMA would buy loans totalling €80 billion to €90 billion, at a price yet to be decided. It was reckoned that ‘among the loans to be transferred are about €60 billion of land and property loans. The remaining €20 to €30 billion of loans are secured on investment properties – office blocks, shops and hotels – which have been provided as security for the speculative loans drawn by developers.’
¹⁰⁴

When asked as to how much of a discount the government would seek on the toxic loans, Lenihan replied, ‘we cannot in this particular exercise show you our set of cards today. We wait to see their [the banks’] position but we have to protect the taxpayer in the interest of the State.’
¹⁰⁵
Davy Stockbrokers suggested a discount of 15 per cent on the book value. ‘This would involve the State paying €76.5 billion for €90 billion in bank loans,’ said
The Irish Times
, ‘or roughly 1.4 times the national debt of the State.’ In the Dáil, Enda Kenny asked ‘how much does the government expect the Irish taxpayer to have to pay for the acquisition of dodgy debts to banks? … The government is asking us to give it another blank cheque.’

Shares in both AIB and Bank of Ireland fell sharply on news of the NAMA plan, while the credit rating agency Fitch stripped Ireland of its top AAA rating, ‘citing the heavy toll on the public finances from the economic downturn’. Ireland’s GNP contracted by an unprecedented 11.9 per cent in 2009, while GDP contract by 7.1 per cent. Yet the Minister’s focus was on ensuring that speculators got a good deal for their loans, and that the banks remained in private hands.

One week after the NAMA announcement, an article appeared in
The Irish Times
which was signed by twenty economists working in Irish universities.
¹⁰⁶
Entitled, ‘Nationalising banks is the best option’, it set out to challenge the logic behind NAMA and to propose an alternative solution to the banking crisis. The economists noted that international financial regulations require that banks hold certain levels of capital in order to stay in business. The deepening recession meant that the amount of bad loans on the banks’ books would increase, thereby requiring the banks to attain capital in order to keep regulatory levels of capital in place. ‘The highest grade and most desirable form of capital is ordinary share capital’, wrote the economists, ‘and in the current circumstances the Irish government is the only conceivable investor willing to provide this capital.’

The NAMA proposal – to buy loans at a discounted price as a means of recapitalising the banks – has been suggested to carry an inherent contradiction. The larger the discount on the loans, the greater the need to recapitalise the banks. Every cent it saved on the loans was simply one more cent to inject into the banks via State (rather than NAMA) recapitalisation. ‘There is thus a fundamental contradiction in the government’s current position,’ read the article. ‘The government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership. These three outcomes are simply incompatible.’ Furthermore, by trying to achieve all three at once, it would end up achieving none:

A Government that needs to be seen to purchase the bad debts at a reasonable discount and that does not want to take up too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, the process may continue to leave us with zombie banks that still require the state-sponsored life-support machine that is the liability guarantee.

The economists proposed an alternative: the nationalisation of the banking system. ‘We do not make this recommendation from any ideological position,’ they said, lest it be thought that they harboured any left-wing views. ‘In normal circumstances, none of us would recommend a nationalised banking system … However, these are far from normal times, and we believe that in the current circumstances, nationalisation has become the best option open to the government.’ They believed that nationalisation would bring transparency to the banks, mainly because ‘The Government would own both the [asset agency] and the banks, so the price would hardly matter’. There would be no need to rob Peter to pay Paul. The separation of toxic assets from the banking system was defended by Dr Bacon and the government as necessary in order to keep stock market listing and market monitoring functions in place. However, as the economists pointed out, ‘The experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions’.

Towards the end of the article, the economists touched upon what they probably believed to be the real reason behind NAMA, but were too cautious to explicitly state out loud. ‘The Government’s plans seem likely to keep in place the current management at our biggest banks,’ they said. ‘It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.’ Nationalisation, on the other hand, would provide a clean break with the dubious practices of the past:

Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-state operations headed by highly independent boards of senior figures of the upmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.

These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.

This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.

Therein lay the rub. Whatever its inherent contradictions, and the way that those contradictions damned it to failure even before it began, NAMA would achieve one thing: the decisions surrounding Irish banks would remain the preserve of Irish bankers. This was a gentlemen’s club, one that had used the Irish economy as it had seen fit for the past eighty years, and it was not about to be dictated to by anyone. This was about power; those who had it had no desire to hand it over, and the Fianna Fáil/Green coalition ensured that there was no need to do so. The parties of government were protecting the needs of a tiny section of society, against the needs of both the state and the wider economy. And even though it had existed for decades, and crossed party lines, the sheer nakedness of the relationship between government, bankers and speculators was a shock to many.

Brian Lenihan speaking in Dáil Éireann, 16 June 2009.

On 7 April 2009, the government published
NAMA: Frequently Asked Questions
, as part of the documents relating to the supplementary budget which was passed that month.
¹⁰⁸
‘NAMA is firstly an asset management company dealing with assets transferred from banks,’ it said. ‘NAMA will not be a bank as it will not be taking deposits from the public and will not have a banking licence.’ It also stated that, contrary to public speculation, Anglo Irish Bank would not be turned into a ‘bad bank’, but instead ‘will remain as a going concern operating at arm’s length from Government’. The initial documents in April 2009 mentioned that NAMA may have recourse to use a Special Purpose Vehicle (SPV) – a financial practice which allows companies to place risky loans off their balance sheets. Enron had used it to hide losses before it filed for bankruptcy in November 2001. The government said that ‘in order to achieve the optimal return, some property loans sold to NAMA will be capable of being transferred into NAMA SPVs which will be capable of being worked out and disposed of in an orderly manner with private equity partners’.
¹⁰⁹
When the NAMA legislation was presented to the Dáil, ‘some property loans’ had become all of the loans earmarked for purchase by NAMA.

On 22 September 2009, Bill Keating, assistant director general of the Macroeconomics Statistics Division, Central Statistics Office (CSO), sent a letter to Eurostat regarding the classification of NAMA and its borrowings. It wanted to know whether these borrowings could be excluded from the national debt. The CSO explained that once NAMA was established, it planned to create ‘a separate Special Purpose Vehicle to purchase certain assets from participating institutions [and that] most of these assets will be loans associated with property development’.
¹¹⁰
This SPV, known as the Master SPV, would be responsible for the purchase, management and disposal of NAMA’s loan book. It would be a separate legal entity, with 51 per cent of its shares held by private investors, and 49 per cent held by the Irish government, which would have a veto over all decisions taken by the SPV. In addition, the Master SPV would have the authority to create a number of subsidiary SPVs, ‘each of which will be responsible for the loan book of an individual financial institution’. Keating said that as the Bill to establish NAMA was currently before the Dáil, he would be grateful if Eurostat could give him an answer as soon as possible. On 13 October 2009, staff from the CSO, the Department of Finance, and NAMA travelled to Eurostat in Luxembourg in order to provide further information. Three days later, Eurostat gave its answer. ‘Based on the preliminary information provided,’ it said, ‘Eurostat agrees with the CSO’s analysis that NAMA should be classified inside the general government sector, and that the Master SPV should be classified in the financial corporations sector.’
¹¹¹
Essentially, the solution to the problem presented by NAMA was to call NAMA something else.