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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Lenihan, NAMA versus the “leave it alone liquidationists” or potential saviours of the Irish economy
By Michael Hennigan, Founder and Editor of Finfacts
Aug 13, 2009 - 9:32:09 AM

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Image of the 37 storey tower for the site of the former Jurys Hotel, Ballsbridge, Dublin. Seán Dunne was refused planning permission for the tower but even if it was available, who would fund the development? How many takers would there be for €2 million apartments?

Finance Minister Brian Lenihan announced in late July, before heading off on a month's holiday, that he would disclose on September 16th, the pricing mechanism for the toxic property assets/loans, which will be transferred from Irish banks to the planned "bad bank" NAMA (National Assets Management Agency). He said value would be based on "long term economic value," but while he could dismiss opponents of the plan  as “leave it alone liquidationists”, like a man trying to maintain a beach footing in the face of an incoming tide, the ground is also shifting on the NAMA value issue. The opponents of the current plan may well have done a significant service for the nation, by the time the Department of Finance returns to the issue later this month.

While a Department of Finance spokesperson dismissed the Supreme Court refusal on Tuesday, to grant the Zoe group, which owes almost €3 billion to its lenders, court protection, as having no consequence for the NAMA process, it would be absolutely bizarre if that turned out to be the case.

Given what was at stake, the Supreme Court was presented with a one page valuation summary and a claim that a huge deficit could be converted into a profit in 3 years.

UCD professor Karl Whelan writes in the Irish Times today:"... it could be argued Carroll’s property empire might be in worse shape than those of other developers. It seems perfectly possible, however, the opposite is the case. His properties mainly consist of Dublin projects likely to get developed in years ahead. Consider, in contrast, the position of those developers who have pinned hopes on developing the proverbial field outside Mullingar."

How could Lenihan  support a low discount on the loans, if a significant number of developers are so under water that his name could be linked for decades to a long period  of economic stagnation?

€90 billion worth of loans is a big gamble to assume, where individual developers may end up having a smaller so-called "haircut" than the taxpayer?

The Irish Independent reports today that members of the Green Party are increasingly uneasy about the NAMA plan and while the Green leader John Gormley, is still happy to remain on Planet Bertie, the NAMA deal would likely put the tin hat on the Faustian bargain, which he agreed with then Taoiseach Bertie Ahern, in 2007.

In the third volume of The Memoirs of Herbert Hoover: The Great Depression, published in 1952, the former president tried to shift blame for the failure of public policy to others, some of them, by then dead.

He wrote in respect of his Secretary of the Treasury, Andrew Mellon on a conversation, which the two apparently had in 1931, when Mellon was 76 years of age: "...the 'leave it alone liquidationists' headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'..." 

Following the information provided by Zoe's Liam Carroll, to the Supreme Court, even though skimpy, it looks likely that there will be some significant liquidations. However, the argument of economists such as Karl Whelan, Brain Lucey and Patrick Honohan, is not that the banks should not be bailed-out with the State having an upside potential as happened in Sweden in the 1990s, but the current plan looks like a bailout of developers, with a  taxpayers likely exposed to a long period of losses.

Tolstoy's opening sentence of his classic novel, Anna Karenina: "Happy families are all alike; every unhappy family is unhappy in its own way...," may be true but big property crashes have a number of consistencies. One is that when a crash follows a big boom, it takes many years for a market to recover. 

TCD professor Brian Lucey wrote in the Irish Times last month: "OECD evidence suggests that bubbles deflate in about twice the time that they inflated. A reasonable estimate of the Irish property bubble would be that the inflationary period was the four or five years prior to 2007. That would imply that we are nowhere near the bottom and that we could in fact see at least another three or four years of declining prices. Purchasing at current market values might then be overpaying for these assets. This is reinforced by other OECD research that suggests that nominal property prices can take upwards of 15-20 years to recover to their bubble peak. This would suggest that it may be 2030 or thereabouts before we see prices back to 2007 values."

On his blog, average peak to trough for 'long term nominaleconomic value' is 17.8 years. Again, given our peak at 2007 we have to look forward to NAMA recovering peak valuations at around, hmmm... 2026... But wait - not all corrections were steep enough to match ours... so let's isolate those that were:

  • Australia 1980s: 18 years;
  • Finland 1990s: 16 years;
  • Germany 1970s: 36 years;
  • Italy 1981: 29 years;
  • Japan 1990: 20 years;
  • Netherlands, 1978: 21 years;
  • Norway 1987: 17 years;
  • Sweden 1979: 31 years;
  • UK 1973: 15 years

Which yields an average of 22.6 years, pushing our recovery to beyond 2030. By this standard, a break even value for NAMA should be based on something closer to 15-16 years, if we are to take a 20-25% haircut on current book values of the loans."

Finfacts said in July that residential site costs as a percentage of total selling costs were about 15% before the boom in Ireland and the US.

As in the US, site costs moved towards 50%.

A US Federal Reserve study on earlier crashes, says it took a full ten years for the real land price index to return to the level at its previous peak in many cities. In a number of large cities - - including Los Angeles, Philadelphia, Providence, RI, and Sacramento - - real land prices did not reach their 1990 peaks until 2001 or 2002, well into the recent housing boom.

So with domestic funding impaired for at least a decade and the UK also struggling with debt, how will the debts be repaid if projects cannot be completed or started?

NAMA will be able to borrow up to €10 billion but given the length of time, it will take for the property market to return to balance, it is likely to be primarily an undertaker.

The national debt was €65 billion at the end of June, up from €50 billion last December.

The one known known is that it is going to get much bigger. As for the unknowns, decisions taken in coming weeks, will be crucial.

NAMA presentations given to the Green Party’s Economic and Social Policy Group on Saturday. July 25, 2009:

UCD's Professor Karl Whelan

TCD's Constantin Gurdgiev

Finfacts summary of Morgan Stanley report on various scenarios for Ireland: Legacy of banking crisis likely to be long-lasting if not permanent increase in net public indebtedness

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