Reflections on NAMA

27th May 2009

Although the general idea of a NAMA type organisation makes economic sense, it is unfortunate that the political vision behind it failed to realise the scale of the resources needed to deal with the estimated 90 billion toxic loans. The reality of the situation is that NAMA was dreamt up without due consideration given to structural considerations.

Since NAMA was announced discussions between developers and bankers have stalled, banks are washing their hands of the problem and handed over responsibility to NAMA even though the execution of NAMA has not been planned. This has added to a climate of confusion.

Tough questions need to be asked before we wholeheartedly endorse NAMA. NAMA began with a study by Peter Bacon, but the brief he was given was a narrow one and did not consider anything radically beyond NAMA or its equivalents. Has enough consideration been given to the efficacy of alternatives to NAMA? Equally as important, what is the proposed financial modelling plan and risk management assumptions for NAMA? Are there any 5 year projections being calculated? What approach will it take to real life economic dilemmas? For instance what would happen in the case of a half built estate—will the assets be liquidated almost immediately or will patience prevail in the hope that they will recover their value in the long term? Has the Government properly considered how destabilizing it would be for, for example, existing hotels if NAMA-owned hotels were sold off cheaply, thus disadvantaging hotels which were not built upon toxic loans?

Questioning the validity of the NAMA model also extends to questioning viable alternatives. There have been two main objections to nationalisation: public service politicisation and bureaucracy, and also the potential damage nationalisation would do to foreign investment. The latter objection at least partly ignores the reality that NAMA will mean the Government assumes the role as a majority shareholder in the banks. Part of the rationale underpinning NAMA is the Government’s promise to levy bank profits if NAMA suffers losses. However, this is a strong argument in favour of nationalisation also as the profits would automatically go to the State. The key question is: would the profits the State would earn by nationalising the banks outweigh the possible loss in foreign investment? I would be interested in hearing the Government’s response to these questions.

If NAMA is indeed the best response to a difficult economic situation, an effective strategy for it could ensure that it does not focus on loans, but should instead oversee the 25-40 or so figures who are responsible for the toxic loans. By leaving the administration of the bad debts to the banks, who have the resources to deal with such administration, the resources required by NAMA would be reduced drastically. NAMA could then take up a role as a watchdog with real teeth to ensure the day-to-day management of the loans by the banks is done effectively and wisely.

The role of the Government cannot be underestimated. It has the ability to suspend time on the loans, but with this ability comes huge responsibility. Development land worth very little in a recession could be allocated to visionary projects according to a medium to long term schedule thus increasing the productivity of the land and the value of the loan. One such example of a worthwhile, large-scale, visionary project could well be the Spirit of Ireland project.

On that note I would like to know what, if any, projects the Government have in mind which would maximise the assets soon to be at their disposal? Because if the projects are either not there or are not visionary enough, then NAMA will be all in vein.