Willie Penrose (Longford-Westmeath, Labour)

I am glad to have the opportunity to contribute to what is probably the most important debate ever to be heard in this House since the establishment of the State. We in the Labour Party have proposed an alternative solution. We then made the difficult decision to propose the temporary nationalisation of the banks. However, the Government has chosen to nationalise the losses but privatise profits. That is the clearest and most enduring difference between the proposals.

The banking crisis which had led to the proposals for NAMA that we are now considering has produced several debased phrases to disguise or excuse those who are to blame for the crisis. We are told that "we are where we are", which implies that we should not ask how we got here. Every statement by the Minister for Finance ends with the phrase "going forward" which suggests that we should not look backward.

We are where we are because of the irresponsibility of bankers and developers, the incompetence of the Financial Regulator and the unwillingness of the Government to heed the warnings of distinguished economists in time to avert the disaster we must now deal with. In 2005 Professor Morgan Kelly wrote an article in The Irish Times pointing out that the total lending of the Irish banks to property developers was greater than the value of the deposits in the banks, and that a collapse of the property bubble and possibly of the banks was almost inevitable. He was immediately shouted down by Government spokesmen and by the Financial Regulator who assured us that the banks were well capitalised. In view of the hopeless inadequacy of the "light touch regulation" implemented by the Regulator it is possible that he actually believed what he was saying.

The Taoiseach, when he was Minister for Finance only very reluctantly and belatedly removed the plethora of tax incentives which fuelled the property bubble, although it had been clear from the mid 1990s that they were no longer needed. The Minister seemed to believe that when the construction sector reached 13% of GDP, while the average for the rest of the EU was about 5%, that this was a cause for celebration rather than alarm. When the global financial crisis broke in 2008 the irresponsibility of the Irish banks was brutally exposed. As Warren Buffet has said we only discover when the tide goes out who is not wearing swimming togs and the global banking crisis of 2008 combined with the collapse of the property bubble has led to taxpayers having to bear the cost of rescuing the banks.

NAMA is the brainchild of Dr. Peter Bacon, former economic adviser to Mr. Bertie Ahern, former stockbroker and property developer and favourite economist of Fianna Fáil. He was the author of the famous report on house prices ten years ago. When implementing the recommendations of his first report displeased the property developers Dr. Bacon readily came up with alternative recommendations that were more to their liking. He proposed that the State, or more accurately the taxpayer, take on the euphemistically entitled "impaired" loans and that with the cash provided by the State - or rather the bonds issued which the ECB will discount for cash - the banks will be able to get on with the business of lending money to business and so help to revive the economy.

There are several potential pitfalls in this plan which the proponents of NAMA seem to be ignoring. Even at the height of the boom the banks were, as they always have been, reluctant to lend to start up businesses or even the expansion of existing businesses and there is no reason to assume that this will change post NAMA. Less than 60% of the lending by Irish banks was financed by deposits from the Irish public. The rest was borrowed from overseas banks and investors and when this source dried up after the collapse of Lehmann Brothers, the Government was forced to guarantee the banks' liabilities and they had to turn to the ECB for funding. Despite the Government guarantee, the banks are finding it difficult to raise money on international markets and are very likely to use the funds supplied by NAMA to reduce their foreign liabilities. When loans are transferred to NAMA, the banks' assets will shrink and they are very likely to use the agency's funds to pay off some of their foreign liabilities. This will result in healthier banks which will be good for bank shareholders, but may not lead to much expansion of credit for small business which is the backbone of the economy, as we very well know.

I assume that the Minister for Finance is aware that the massive quantitative easing in the UK and the USA, which will have the same effect as NAMA will have on banks funding, and has not led to an expansion of credit. I see no proposals in the Bill before us that will ensure that when NAMA is set up the banks will be induced or compelled to increase their lending to the productive sectors of the economy.

In the past, Labour Party proposals for a third banking force were strongly resisted and even sneered at, by the main banks in particular, and even the State development banks, ACC and ICC were privatised - a very bad decision in my view. The Government therefore has very little capacity to ensure that any bank lends to the productive sector of the economy. I should like to see concrete measures incorporated in this legislation to ensure an adequate supply of credit to small and medium businesses. There are 250,000 small and medium-sized businesses across the country employing some 750,000. That is an important statistic, one that is real and impacts on the lives or real people.

The valuation of the NAMA loans has been the subject of much scepticism by economic commentators and has been referred to on numerous occasions in this Chamber today. The Government considers the discount which it has secured is sufficient to recover the full value of the loans on the basis of only a 10% increase in property prices. This may seem a very cautious provision, but there is a possibility that some of the development land acquired by NAMA may in fact be worth only its agricultural value, which itself has fallen significantly in the past year. In some counties there is land zoned for housing to meet housing needs for the next 50 years. NAMA will also acquire half-built housing estates in many areas where there is no demand for housing .and some of these houses may eventually have to be demolished. If zoned land and unfinished housing constitute a substantial part of the assets that NAMA will acquire, the valuations may be wildly optimistic.

NAMA also proposes to acquire performing loans which are meeting interest payments. I cannot see how NAMA can pay less than the value of performing loans to the banks without facing legal challenges. The management of the banks may be willing to accede to the acquisition of performing loans because of the scale of the Government's shareholding, but the bondholders are likely to resist as they stand to lose if NAMA buys bank assets at too low a price.

As I understand it, the Government is prepared to accept a proposal which emanated from the new Governor of the Central Bank that NAMA pay a reduced value for the loans, but give the banks a share in any increase in their value which the agency can achieve. The Government should give serious consideration to that proposal, in my view. It is suggested that part of the payment to NAMA will be in the form of a bond whose value will depend on the rate of recovery achieved by the agency. This provision would provide some return to the taxpayer, but the question arises as to how much the bonds will be worth. If the market considers that significant amounts of NAMA assets are worthless, the bonds may be worth very little and the banks will not be able to regard them as assets which will not improve their funding position.

The Minister argues that NAMA will make a profit because when the loans are repaid or the security underlying them is realised, the proceeds will be greater than the original cost. This prediction assumes that the long term economic value of the assets acquired by NAMA will be realised. However, NAMA can only make a profit by paying less than the long term economic value - and so any profit it makes will be at the expense of the banks.

The setting up of NAMA involves the largest expenditure of public money on one project since the establishment of the State. It also involves an enormous increase in Government debt at a time when people are being forced to accept higher taxes, lower public spending and cuts here, there and everywhere. Let us not forget that the borrowing to fund NAMA will ultimately be repaid by the taxpayer.

I was astonished to hear some Fianna Fáil Deputes state recently that NAMA will be funded by the European Central Bank. The ECB will discount the bonds given to the banks by NAMA, but bonds are a form of borrowing that will ultimately have to be repaid - like all Government borrowing - from tax revenue. Ministers have not actually misrepresented the reality of the bond issue, but are trying to give an impression that somehow we are getting a great deal from the ECB; or that the ECB has set the interest rate for the NAMA bonds; or that NAMA is somehow backed or approved by the ECB. These assertions are wishful thinking. The ECB will discount the bonds at the appropriate market rate and that rate is likely to rise, as many other countries are increasing their borrowing.

Let us break down the figures for the cost of NAMA into numbers that are intelligible to everybody outside in the street, but do not seem to make sense to the Minister for Finance and his advisers. NAMA will impose a tax of €1,500 for every person in the State for the next 20 years. Borrowing the money to fund NAMA will bring our national debt to €1.75 trillion which represents €1 million for every two workers in the country. A small fraction of this borrowing would fund all of the capital needs of the country.

Let us be clear that rescuing the banks will mean that many children will continue to be taught in freezing prefabs with leaking roofs, we will continue to have a public transport system that is less effective than that of some third world countries, we will continue to have the highest pupil-teacher ratios in the world and every day people will languish on trolleys in our hospitals. This is the impact it will have.

NAMA represents an enormous transfer of public money into private hands, the hands of bank shareholders. It is a grim example of what the Nobel prize-winning economist Joseph Stiglitz has called "socialism for the rich, markets for the poor". We used to be constantly told that markets were all about risk-taking and that in a dynamic market economy, losses and business failures are inevitable. I recall the chief economist of the Bank of Ireland, Dr. Dan McLaughlin, expressing a view in regard to the workers who were made redundant by Irish Continental Lines to be replaced by cheaper labour from poor countries. Dr. McLaughlin's view was that free markets inevitably lead to such results but that markets are always right. I am surprised that Dr. McLaughlin has not applied the same logic to Bank of Ireland shareholders, who, in his view, are clearly more worthy of State support than the ferry workers or many other workers throughout the country who are fighting their corner to try to secure a decent standard of living.

We are repeatedly told that NAMA is the only game in town. However, we have put forward an alternative and articulated the reasoning behind it, and it has received the support of some very eminent people. Nonetheless, it is a game in which the dice are heavily loaded against the taxpayer. In the USA, the troubled assets relief programme was originally based on the idea of overpaying for assets but Congress refused to sanction this approach and the programme is now based on equity investment in the banks, which will yield a return for the taxpayer. While asset management agencies have been used in other countries to enable banks to offload bad loans and get on with lending for productive purposes, these agencies have paid realistic market values for the impaired loans, which minimises possible exposure and losses for the taxpayer. The ECB, which will ultimately provide cash for the NAMA bonds, has recently stated that where assets are purchased, the price paid should be "mostly risk-based and determined by market conditions", in contrast to the Government's approach of deliberately paying more than market values.

The experience of previous asset management agencies shows that when the assets transferred to the agencies have been a large fraction of total bank assets, the agencies have struggled to succeed. While the assets likely to be transferred from Bank of Ireland are not large in total, those transferred from AIB represent a significant sum. In the case of Anglo Irish Bank and Irish Nationwide, they would have collapsed a year ago had the Government not introduced the guarantee. It was argued at the time that Anglo Irish Bank and Irish Nationwide were of "systemic importance" and that winding them up would have had negative effects on the whole banking system. I am not convinced this was the case. While the depositors in Anglo Irish Bank and Irish Nationwide were protected, the bondholders who lent to these very risky institutions should have been made bear at least some of the consequences of their irresponsible lending.

As the Minister for Finance would reply, however, we are where we are. What must now be done is to ensure that NAMA operates at the least cost to the taxpayer and, if possible, provides some return to the taxpayer for the enormous sums of public money that must be provided. I understand the Green Party is seeking a social dividend from NAMA and I note that the Construction Industry Federation appear to be opposed to this. The opposition was expressed most vehemently by the head of the CIF, Mr. Tom Parlon, former Minister of State for the Progressive Democrats, who were such cheerleaders for the unregulated free market that has greatly contributed to the crisis.

If any good is to come out of this crisis, one element must be that the provision of vital social amenities should not result in huge profits for speculators, as it has done over the past decade. We have seen the Minister for Education and Science having to pay huge sums of money for primary school sites to developers when the planning permission made no provision for social amenities. We have seen housing estates built without even adequate footpaths, much less any amenities that would make them tolerable places to live. All of this is the result of Fianna Fáil policy which has always put the interests of property speculators over the interests of the community.

The provisions of the Kenny report on building land prices of nearly 30 years ago are being dusted down and reconsidered. Every time the Labour Party sought the implementation of the Kenny report, we were told that it would violate the Constitution, although leading experts on the Constitution were convinced it would not. Had the report been implemented, not only would we not have had the current crisis but we might not have had the problems revealed by the Flood and Mahon tribunals.

NAMA must end definitively the notion that housing is a speculative asset rather than a basic social need. The debased approach to housing has left us with 50,000 people on local authority waiting lists while in every town and many villages we have thousands of unsold houses, the weeds growing through their windows, whose builders await rescue by NAMA. If NAMA is to have the support of the taxpayers who fund it, it must ensure a social dividend for the wider community commensurate with the enormous sum of taxpayers' money necessary to fund it.

What has been of great concern to me and many people we encounter on the streets or at our clinics revolves around the significant and increasing cohort of people, especially young people, who paid exorbitant and unsustainable prices for their houses, and who now find themselves unable to meet their huge loan commitments and, increasingly, find themselves in the zone of negative equity. People retort that no form of NAMA has been put in place to deal with the dilemma that these people now find themselves in. It would be a significant dereliction of the duty of this House if the banks were not required as part of the conditions for them receiving this unprecedented injection of taxpayers' cash to recognise the difficulties these young people are now in, and to devise appropriate measures and schemes of arrangement tailored so as to ensure that these people's homes will not be subject to repossession orders, and that the banks have a recognisable, defined obligation in this regard. It would be some kick in the teeth to the taxpayers and the public to find that as soon as the President signs this Bill into law, we are treated to an orgy or frenzy of court applications for possessions because unfortunate people have defaulted upon their loans.

The proposal of my colleague, Deputy Michael D. Higgins, for the establishment of a homes protection commission is an excellent one, which should be taken on board by the Minister. During the course of my recent attendance at the national ploughing championships, I took the opportunity of speaking to many farmers and their representative organisations, which left me in no doubt as to their bewilderment and anger at the proposed 80% rate of capital gains tax on the gains arising from the disposal of rezoned land which the Government has indicated it intends to introduce on Committee Stage of this Bill. Notwithstanding the draconian nature and rate of this tax, surely it is a case of closing the stable door after the horse had bolted. It should have been introduced much earlier because the level or frequency of windfall gains are unlikely to figure much on the landscape in the future, and the level of any such contemplated disposals are likely to be postponed or discouraged completely. Therefore, the level of income the Government will derive from such a source will be negligible.

Section 155 of the Bill is also causing considerable angst among the farming public. One can appreciate that their concerns are well-founded in so far as it empowers NAMA to acquire land by CPO in order to maximise the value of properties which it would already have on its books. Such lands must be acquired by agreement and, of course, the acquisition must be deemed necessary, but the key question is what acquisitions will be defined as "necessary". The Minister should consider these aspects of the legislation carefully before proceeding to embed these concepts in statute law as they constitute gross unfairness and are based upon the anvil of discrimination.

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