Going public about Nama"s banking strains is a good thing

The bursting of the property bubble created such a big banking mess that it was inevitable there would be disputes about the best way of cleaning it up. Last week Michael Somers, the head of the National Treasury Management Agency (NTMA), the debt agency he set up almost two decades ago, spoke frankly, as is his habit, about the huge task involved in setting up the so-called bad bank, the National Asset Management Agency (Nama). Nama is the Government"s chosen vehicle to cleanse the banks of their outrageous property loans by formally shifting the liabilities onto taxpayers. Somers told an Oireachtas committee that he, too, was 'aghast' that much of the €90bn of property loans were advanced to a small band of property developers. Somers went on to say that the plans to set up a bad bank were still at a very early stage and, strangely for a senior official appearing in front of a parliamentary committee, gave the impression that his enthusiasm for Nama was less than total. Hinting at official strains about Nama, he said that lawyers down at the Four Courts would probably benefit most from the rows generated about property title when the complex property loans were unpicked. Apparently, Somers" reported comments did not go down well at all with officials at the Department of Finance. Minister for Finance Brian Lenihan last week was in the middle of a roadshow of European capitals, talking to hundreds of sovereign bond traders who buy Irish sovereign debt. Lenihan"s assurances about the Government"s determination to control Government borrowing reportedly went down well with the people in Paris and London who will be needed to buy Irish Government debt. It is hard to decipher whether the official strains that Somers hinted at will lead to a reshaping of Nama. But the spat contrasts with the plan presented to journalists early last month when Peter Bacon, the architect of Nama, produced a report that presented the issues with some clarity. It argued that the alternative plans advanced by the British government to deal with its banking crisis by guaranteeing rather than buying the bad property loans would likely not work here. The report called for the State, through Nama, to buy all the €90bn of property loans - equivalent to half the annual output of the economy - at an undisclosed discount from the banks. In return, the Dublin banks would receive bonds for the value of the discounted assets that they could place with the European Central Bank to boost their capacity to lend to businesses and individuals when demand picked up in the future years. Thus, the banks would be cleansed from their hugely impaired assets. Their bad property assets would be removed, helping the banks to function as banks and create credit. Meantime, Nama would manage the huge landbanks and office blocks which would then, hopefully, be sold off at no, or little, loss to the taxpayer after 10 or 15 or 20 years. The property assets would be removed from the bankers who created the mess in the first place. Last month"s presentation could only be faulted in that Bacon did not disclose how much less than €90bn, or the discount, that the e State should pay for the souring loans. This is probably what government officials have been arguing about for the past several weeks. At first sight, it would appear that the less Nama pays, the better the deal for the taxpayer. But we have painfully learned there is no such thing as free money when banks need to be bailed out by the State. The taxpayer will have to pay one way or another, even if Nama were to do the popular thing and negotiate to pay, say, a third or a half for the nominal €90bn of impaired assets. The bigger the discount, the better the deal for the taxpayer, right? Unfortunately, it appears it does not quite work out that way. The bigger the discount, the deeper are the bad debt holes the banks will need, under accounting rules, to refill for them to stay in business. The only people left to fill those holes are taxpayers. Paradoxically, if the State, through Nama, overpaid for the property loans by paying the banks the face value of the €90bn loans, the taxpayer would need to put up less cash upfront into the banks. Of course, there is no free money because, over the next 10 or 15 years, taxpayers would have to pay out anyway on the liabilities of the banks. The Economic and Social Reserach Institute (ESRI), in a report last week, estimated that the Government debt, including the cost of Nama, will peak at about €165bn, or 110 per cent of GDP, by 2014. That"s a huge increase in debt from the 20 per cent level it stood at last year. But, no matter how it is done, fixing the banks will not come cheaply for the taxpayer. The ESRI report shows that getting to grips with the banks involves huge sums and borrowings for many years for the taxpayer. Since the Bacon report was published before Easter, there has been little news about the plans for Nama. Officials need to set aside their traditional preference for secrecy and come out and discuss the available options for Nama. The public may then better understand the nature of the crisis. By hinting at strains, Somers last week may have done us all a favour.