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The Irish Times article argues that NAMA should pay the banks only the current market value for the loans it will assume.
The newspaper says NUI Galway economist Alan Ahearne, special adviser to Minster for Finance Brian Lenihan, said last night that a number of claims in the article were incorrect. He added that most of the economists in the country had not signed the article drafted by Prof Brian Lucey of Trinity College.
Lucey said he had contacted about 250 lecturers in economics and not one had come back to say they disagreed with the views expressed in his draft. He said a number did not sign because they did not want to get involved in a round-robin exercise.
The economists say the Government will pay significantly above market value for the bad loans advanced by the banks.
“The key difficulty facing the Government is that to pay prices now prevailing would leave the banks sitting on losses sufficiently large as to effectively bankrupt them, which would then require the State to invest capital sufficiently large as to in effect nationalise the banks,”the economists say.
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“It is thus clear that the Government are determined to pay a price for land and speculative developments greatly in excess of the market clearing price.”
The economists say that by overpaying, the State would wind up transferring to private individuals a sum close to Exchequer’s entire annual tax-take.
Alan Ahearne contacted former colleagues via e-mail in response to the draft article.
“I’m afraid that anyone who is trying to suggest that they can make a reasonable guess at the ‘true value’ of the loans without knowledge of any of the details about the individual loans is either delusional or is being disingenuous,”he said.
Ahearne also said the notion of making the bondholders swap debt for equity showed “a startling lack of understanding” of the bondholders’ position, given that they were covered by the State guarantee and bonds might have been bought after the introduction of the guarantee.
“I hope you agreed that what you have been asked to sign is a rather poor piece that unfortunately does nothing to inform this crucial debate,”he concluded.
However, in a long Sunday Business Post article on NAMA, on August 16th, Ahearne shed no light on the crucial issue of valuation.
He wrote: "The transfer value will be in accordance with EU Commission guidelines on the treatment of impaired assets.
The Commission is very clear on this issue: the loans are to be transferred at values based on their so-called ‘real’ -o r long-term - economic value. These are the terms used by the Commission. Paragraph 41 of the commission’s communication published in February states that “ . . .the transfer value for asset purchase or asset insurance measures should be based on their real economic value’’. Annex IV of the communication states that ‘‘the objective of the pricing must be based on a transfer value as close to the identified real economic value as possible.’’"
UCD's Prof Karl Whelan wrote on the Irish Economy blog on July 30th: "it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows. And as long as the calculations are presented in a coherent fashion according to a model like the one above, I suspect that the Commission will declare that they have met the guidelines."
As to whether NAMA could recoup losses from the banks via a levy, if the discount on the loans reflects too optimistic a view on a property market, which could take 10-20 years to recover, Whelan wrote on Tuesday: "My worries here are (a) It’s an “understanding” rather than anything that will appear in legislation, so I have no faith that it will ever appear or, that if it does, it will be based on anything like the actual combined cost of NAMA to the taxpayer. (b) If it really becomes apparent that a levy will apply and then NAMA is running losses, this will cast a shadow over our banks for years, so that NAMA will have failed in its goal to draw a line under the problem."
Besides the issue of valuation, it is unclear how the €10 billion lending facility will be administered.
NAMA has begun operations conforming to the culture of Victorian era secrecy [SEE: The Waste Land - - Bord Snip, Irish Public Spending Transparency and the motto "Never do anything for the first time"] It is a bad start.
Brendan McDonagh has been appointed Interim Managing Director. His experience has been as an accountant working in the public sector - - the ESB and at the National Treasury Management Agency (NTMA). He was previously Director Finance, Technology & Risk with the NTMA. He had held that post since 2002. Prior to that, he was Financial Controller (1998-2002) of the NTMA.
On May 5th, the Minister for Finance said that McDonagh "will be assisted by a high level advisory committee to be named shortly."
What does "shortly" mean?
