Michael Noonan (Limerick East, Fine Gael)

This time last year, the event that normally is taken to be the starting date of the international banking crisis took place, namely, the collapse of Lehman Brothers. A fortnight previously, the then regulator and Governor of the Central Bank appeared before a joint committee of the Oireachtas and assured its members there was no problem with Irish banking, that they had stress-tested the loan books and that there was absolutely no problem. A fortnight later, the Minister for Finance and the Taoiseach attended an all-night meeting that ended with a decision to provide a guarantee to the banks in case they all went bust. Shortly afterwards, Anglo Irish Bank had to be nationalised. As these were the events of just 12 months ago, matters have moved on rapidly since.

The biggest problem I perceive concerns the tardiness of Government decision-making. Since the collapse of Lehman Brothers, the authorities in the United States have intervened and have rescued the banks they wished to rescue to the degree that the latter now are trading profitably and have paid back much of the money they received from the authorities. In addition, it is worth noting that while 42 bankers have been put in jail in the United States within the past 12 months, we still are wondering what to do resolve the banking crisis, which is an absolute prerequisite to resolving the economic crisis. However, the slowness of the decision-making process in both the Government and the public service is one of the major problems this country faces. It presents a credibility issue as to whether the individuals involved from the political world and the public service are up to it. I will leave that question hanging in the air because many people would suggest the tardiness of the decision-making demonstrates they are not.

The second problem I discern is that NAMA is being introduced by a Minister who is relying on information provided by the banks and the regulatory authorities. There is no other source of information and without putting a tooth in it, the banks have misled this House, the Irish public, their shareholders, the Minister and the Government over an 18-month period. How many times did senior bankers assert there was no problem in the Irish banks, that they had no toxic or bad loans, that they did not seek or need private equity and required no new capital? If one goes back over the quotations during the last 12 months, such assurances have been given by the banks time after time. Were lying an Olympic sport, we could put out a team of bankers who would win gold for Ireland. However, we now are relying on the same group of people to provide information, which presents the Minister with a fairly significant credibility problem. Nevertheless, we must do our best under present circumstances. The Minister has made the wrong decision and the model proposed by Deputy Bruton on behalf of Fine Gael was better. However, as it appears the Minister's proposal will be carried on Second Stage, Members must evaluate whether the situation can be improved.

In that context, what concerns me most is the possible exposure of the Irish taxpayer. The Minister, relying on information from the banks, essentially is taking the value of the loan books and discounting them by 47% to get market value, which actually turns out to be €47 billion. He then intends to add another €7 billion for medium-term economic value or whatever. While that looks like a minor addition, the real issue is that if he has got his sums wrong in calculating market value, the gap then is much more significant and wide and the exposure of the taxpayer is far more serious. The surveys suggest that to date, the value of all property has fallen by 45% since the peak in 2007. As the Minister has taken a figure of 47%, he has opted for a figure that is two points higher than that. However, the issue is whether property values are still falling. Where is the evidence that we have hit the bottom? I cannot discern any such evidence from what is published in the newspapers or from the small number of property transactions that are taking place nationwide. It appears as though values are still falling and may continue to so do.

Valuing property and estimating market value in the depths of the recession is extremely difficult. The information pack produced by the Oireachtas Library & Research Service on NAMA has been excellent and it also produced a supplementary paper on how to value property. It is possible to value it on rental yield on the basis that such a yield normally should be approximately 5%. In 2009 however, both Morgan Kelly and Ronan Lyons estimated that values must fall by 60%. In other words, if one uses that method of valuing property, there is another 13% to go beyond the Minister's calculations. According to the aforementioned paper, a second way to value property is on the basis of affordability. Since the mid-1970s and until the madness set in over the last four or five years, affordability for a residential property was taken to be four times the average industrial wage. On that basis, the discount again must be 60%, not 47%, to bring down residential property prices to their current real market value. These are the best estimates and this is what professional valuers do.

The Minister comes out looking somewhat better using two other measures. If one considers what happened elsewhere during major property busts worldwide, the average discount works out at approximately 30%. However, such busts tended to last for four and a half years in the residential market. This suggests that while the discount was not as big, the trough lasted for a significantly long time and that there will be no lift in Ireland's residential market for another two to two and a half years, during which it will be crawling along the bottom. The fourth method to evaluate property is on the basis of long-term trends. The Minister has used this method, took a base year of 1975 or thereabouts and worked therefrom. One can vary this and one will get very different answers depending on whether one decides to finish it in June 2009, June 2008 and so on. Consequently, this method is highly susceptible to the period of time over which one measures long-term trends or what is one's base year and finishing year. On that basis, the paper suggests while commercial property is at or close to its long-term average at present, residential property has some further way yet to fall. The burden of the evidence suggests that the figure of 47% is highly optimistic and that the real fall will be approximately 60%. If this is the case, the Minister's starting point will add on approximately €20 billion and not €7 billion. On that basis, the exposure of the taxpayer will be significantly higher than is argued by the Minister. The Minister might answer a number of questions when he winds up. The idea that builders and developers put up 25% of the cost in private equity has disappeared from the Minister's script. Deputy Willie O'Dea seemed to suggest that it has disappeared from the calculations as well. The 25% of so-called private equity was borrowed elsewhere and was not really private equity. If that is the case, we need that on the record. The Minister was very strong on that a couple of weeks ago, saying that the real model was 25% of private equity and 75% borrowed. That has now disappeared from the calculations.

What about loans under €5 million? We do not have that many multimillionaires in my constituency but many are stuck with assets below the €5 million mark. I understand that NAMA is no longer taking on any loans under €5 million. What will happen to these? Will they be at the tender mercies of bank receivers? Will it be open season on the small fellows while the big fellows will be protected? There is a suspicion that the banks will really go after the smaller guys now and tidy up their balance sheets on that basis, while NAMA has an umbrella over the big developers.

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