Tuesday, 22 September 2009
National Asset Management Agency Bill 2009: Second Stage (Resumed)
2. The Government has not facilitated a review by the Oireachtas of independent analysis of alternative banking solutions which international evidence suggests are likely to be more effective at getting credit flowing, less costly and fairer for the taxpayer and less vulnerable to political manipulation and business lobbying.
It is hard to believe what has happened to our economy since the last election. All who sat here on the first day of the new Dáil could not have imagined what would happen over the next two years. I include those, that the members of the Labour Party who were critics of the way things were and those of us who had alternative perspectives on housing and other issues. Who would have thought that capitalism and free-marketeerism, as practised in this and other countries, would actually fail?
Land speculation has brought this country to its knees and has brought the economy toppling around us. We have found that our economy was built on a house of cards. I watched Pat Kenny's new programme last night and there was a gentleman on it who said every family in Ireland has been affected. He was correct. Irrespective of our socioeconomic backgrounds, everybody in Ireland has been affected by the economic crisis, to varying degrees. None of us can assume what we used to assume. This applies to how we live our lives and to what we expect in our local communities. Nobody knows when school buildings that were campaigned for will be developed. When will we ever see the promised Luas and metro lines and other infrastructural developments?
Plans we have for our children are now in question. My daughter started primary school just a couple of weeks ago. Circumstances are now very different for parents and we cannot make the same type of assumptions about children's prospects in terms of third level education, for example. There are unfinished developments and empty buildings, including in areas such as Lucan, which I and the Minister of State, Deputy Curran, represent. We had great hopes for such areas. In places such as Adamstown, development has been very good to date but the building works have basically stalled. People do not know when Adamstown will be developed.
It is difficult for everyone in this country at present. It is a difficult time for politicians of any hue, both in Government and Opposition, even though it might seem like an opportunity for the latter. The economic prospects are as scary to the Opposition as they are to the Government. How can one promise a better future, better education system, better health system and better local government and be credible in light of the current economic circumstances?
The most galling figure for me is that €28 billion is apparently to be spent by the Government on buying out a bank which, to be honest, I never heard of until relatively recently. I speak for most of the population in this regard. As we know, one could not enter an Anglo Irish Bank branch in any town or village around the country; it was just not a bank with which most of us dealt. It is the bank that is to be bailed out the most under the bank guarantee scheme and NAMA. What is really surreal for me is that despite all that has taken place and despite everything being thrown into question in terms of the economic philosophy that underpinned the actions of our Government and governments in other countries, the same assumptions about how our economy should be organised prevail and NAMA is a part of those assumptions. The assumption of many commentators in the media is that we can go back to business as usual. It is unfortunate that the predominant voices in the media basically make the same assumptions we had in the past.
Let us consider some of the developments in recent months, including the report of the Commission on Taxation. There is a lot of jargon in the report and the idea that tax can somehow be revenue-neutral is a nonsense and is nothing more than Orwellian speak. The report addressed the need to limit tax on labour, which is income tax. The Minister for Communications, Energy and Natural Resources, Deputy Eamon Ryan, has used the same language and spoken of the need to limit tax on labour, in other words, that there is a need to reduce income tax, the fairest form of tax. This is the predominant view now about taxation. I was amazed there was not more comment on the fact that the one proposal of the report of the Commission on Taxation concerning income tax cuts proposes that the top rate be reduced by five points and the lower rate be reduced by two points. This is exactly the taxation policy that was in place when Fianna Fáil was in government with the Progressive Democrats during the past ten or 12 years. When there were income tax cuts they always benefited the most well off. They were regressive tax cuts and other stealth taxes were introduced which have also been proposed by the Commission on Taxation which would hit middle and lower income people most. I will refer to the matter of taxing or means testing child benefit later.
The McCarthy report is concerned with rolling back the State and suggests that the State and the public sector is the problem. This is despite the OECD study from the year before last which found that Ireland's public sector was not too large but modest compared to other countries. The McCarthy report recommends cutting 17,000 public sector jobs despite the fact that we need jobs now more than ever in our economy and it is very difficult for the private sector to provide such jobs. Under the McCarthy report there would be more people on the dole and out of work.
The McCarthy report makes many suggestions concerned with reversing social progress such as reintroducing third level tuition fees and cutting 2,000 special needs assistant posts. It is very much a return to the old slash and burn approach of the 1980s which decimated our health system. There are alternatives to the slash and burn approach to which I will refer later. However, there is a view that in a time of plenty one should save money for a rainy day - something of which the Government did not do enough; it cut taxes when it did not need to do so and in an unfair way. One should spend in a time of recession. Many countries which have done this are showing a turnaround not apparent in this country.
The NAMA proposal is based on the assumption that we can go back to a property bubble; that is what NAMA is about. The Green Party is making hay of the fact that it will introduce a windfall tax. I will believe it when I see it but that is another point. The fact is one must rezone land to get money from a windfall tax and there is no way such a tax could be retrospective on land already rezoned and for which planning permission has already been granted. It is a return to the old thinking of raising property values and rezoning land. I presume from the statements made by the Taoiseach and the Minister for Finance that some of the land NAMA will own is not rezoned. Will there be pressure now under NAMA from the different interested parties to have such land rezoned so that more money can be made out of it in the long term? Despite numerous announcements by the Minister for the Environment, Heritage and Local Government, Deputy John Gormley, that he will reform the planning laws and stop unsustainable planning, there is no sign of this happening. I tabled a question last week about that Bill but it is not on the list of Bills for the next legislative season; as far as I can see the Government list of Bills extends to 2010 but there is no reference to this type of planning Bill. When I put a question on the matter to the Taoiseach he did not have much to say about any such Bill.
It is also disappointing that the majority of the media seems to be totally buying the same economic philosophy that we have had in this country, including that we must have NAMA, we must have the Commission on Taxation report implemented and that we must have the McCarthy cuts implemented. That is what I interpreted from The Irish Times editorial which suggested the Government is lily livered if it does not implement the recommendations of the Commission on Taxation. It refers to the Commission on Taxation being established to spread the burden of tax and to make taxation fairer. In no way will the recommendations of the Commission on Taxation make our taxation system fairer; they would do the reverse, make it more unfair and undo much of the social progress we have made in recent years.
I do not believe the media - in the broadest sense of the term - is representative, although I recognise there are different voices. However, the predominant voices in the media and in the editorials of such newspapers as The Irish Times and Irish Independent are out of step with the public. The people I meet in my day-to-day work as a public representative question the way things were and the way our society was organised during the era of the Celtic tiger. In on-line debates about our economy and NAMA there is a good deal more diversity of voice in terms of political blogs and so on in which young people question the way things were and believe things can be different.
If everything we did brought us to where we are it is time to start to consider doing things differently. There are alternatives and there is a different way of approaching recessions, depressions, good times and economic growth. Such an approach is being implemented in other countries throughout the world. The IMF has said one of the reasons France has been cushioned against the recession is because of its large public sector. Having a reduced public sector may not help a country but having a large public sector may help because the public sector provides jobs and necessary public services. It has educated our children and looked after our sick people and so on.
I refer to fiscal stimulus such as those proposed by the Labour Party. We propose building schools. I have tabled parliamentary questions about school buildings that are badly needed in my area and which are so rated by the Department of Education and Science but I have ascertained from the replies that nothing is happening and that there are no plans for building such schools. If we built schools we would put people back to work and they would pay taxes which would return to the Exchequer. These people would buy goods in shops, make the economy more confident and get it moving again. This is the type of approach which has been implemented in other countries, such as in the United States of America by President Obama. This approach was also implemented by Franklin D. Roosevelt during the "New Deal". Not only did this approach help the economy, but it helped to address a hardship in society by ensuring as many people as possible had jobs and it did as much as possible to protect people in terms of work and income. It seems the opposite approach has been taken and will be taken here by the Government.
There have been alternatives all along including those proposed by the Labour Party. Deputy Michael D. Higgins in an article in The Irish Times recently pointed out it is not true to suggest everyone was cheerleading the Celtic tiger. There were people who proposed alternatives about how to provide homes for young people. Deputy Eamon Gilmore, the Labour Party leader, led a commission on housing in 1999 which recommended taking the decisions about where housing should go, namely out of the hands of developers and into the hands of the State, local authorities and local communities.
Let us consider new Labour in Britain. Where new Labour in Britain went wrong - if it did - was buying into the idea that the market is supreme. We must decide that in future there are areas in our lives where the market has no place. That can be done as much in bad times as in good.
The NHS was established in Britain after the Second World War, and the French also brought in their health service, a universal state system found by the World Health Organisation to be one of the best in the world. In Ireland, children's allowance was introduced in 1943 at two shillings and six pence for each third and subsequent child under 16. It was not means-tested and it helped 320,000 children at the time. It was extended to the second child in 1952 and all children in 1963. Having experienced great wealth, we find bankers are now being bailed out and €28 billion is going to Anglo Irish Bank but we are talking about taking away children's allowance from some. Unfortunately, the media is a cheerleader for that. Despite children being our future, we are talking about taking away something we introduced in the 1940s when food was rationed.
There is an alternative to NAMA. If the State and taxpayers are handing over an amount of money which could easily buy those banks, we should own them. That has been done in many other countries. If we go back to normal we will have the banks go off into the sunset, leaving taxpayers burdened and resulting in the loss of social progress made since the State's foundation. We can act differently by nationalising the banks and setting out to genuinely create a much fairer and more sustainable society from the current economic recession.
In the 1970s I worked as a financial controller in a large building firm in Cork. At that time the country was in the throes of an economic crisis not much different, and possibly worse, than that being experienced today. I know first hand the problems facing small, medium and large firms. At that time the unemployment rate was greater, emigration was rife, inflation was high and interest rates were at their peak.
There is one difference between now and then; at that stage there was agreement across the board that we had to work together to get the country out of its problems. The types of innuendo, half-truths, rumours and allegations being floated around these days by the usual suspects outside the political field and by some senior members of the Opposition, who know better, were absent.
The Opposition has a duty to ask the hard questions but it is clear it is not interested in the answers. It is doing a great disservice to the nation in this approach. The continual emphasis in its approach to NAMA that the agency is out to save the bankers and developers is cynical and untrue. People in glasshouses should not throw stones. The implication is that bankers, including the CEOs and chairmen, are friends of Fianna Fáil but one only has to look at the party affiliations of some senior board members of the main banks to see that such an argument does not hold water.
To suggest that all builders and developers are Fianna Fáil supporters is to ignore the facts. It is time to stop this nonsense and focus on the real issues facing the economy. As an accountant for many years I have had dealings with financial institutions on behalf of clients and I understand the need to acquire cash and credit to run businesses. The Government recognises that what is now required in this economy is a healthy and working banking system.
The course of action being taken by the Government in establishing NAMA is based on advice it has received domestically, the advice of institutions such as the IMF and also the example of other countries taking similar steps. There is much praise from Europe for the action being taken. Jean-Claude Juncker, the Prime Minister and Finance Minister for Luxembourg stated that he thought "the Irish Government, with great courage and a deep sense of responsibility, is on the way to taking the right step in a very difficult situation". Jean-Claude Trichet, the ECB President, stated "In these circumstances, what impressed me the most in Ireland was the level of national unity I perceived". He also stated that NAMA was very well oriented.
The ESRI has backed the measure and Mr. John Fitzgerald has said that the Government had got it right with the supplementary budget and the country was on the right track. Mr. Peter Sutherland said "What we are not recognising is that we have great strengths and the position is not quite as bad as is being painted. Standard & Poor's has backed NAMA, indicating that it thinks "the plan could achieve the Government's stated objectives of putting the banks on a stronger footing, restoring investor confidence in them and improving both their liquidity and their capacity to lend to credit-worthy Irish borrowers". Maarit Lindstrom, chief economist of the Finnish Chamber of Commerce, stated that the creation of a bad bank to relieve lenders of toxic assets had proved to be a positive experience in Finland in the 1990s, and the Irish Government needs to intervene to relieve the banking sector of bad assets in order to create trust and so forth.
We need to know that when we put money into a bank it will remain secure. We need an efficient system of payments in the economy and if we allow banks to fail, it will leave businesses and individuals at a loss of their savings, undermine confidence in the banking system in general and cause serious damage to the economy, which would require even greater State intervention to fix.
The problem with Ireland's banks that hinders them in functioning properly is a lack of adequate capital, which would give them a buffer to absorb losses if and when they occur while keeping depositors' funds. Adequate cash resources are needed to allow banks to repay depositors and lenders and make new loans available. A lack of long-term profitability will be an obstacle to building up capital to allow banks to offer greater lending and buffers against losses.
For the Irish banks, capital and liquidity have been much more difficult to access at the very time they are needed most. In order to protect savers and the economy, the Government introduced the deposit guarantee scheme, injected capital into the banking system and nationalised Anglo Irish Bank. The Government interventions to date have been bold and aggressive, and together with the support of the European Central Bank they have succeeded in protecting the banking system. However, the problems arising from the banks' exposure to risky loans, especially with regard to property, cannot be allowed to continue as the banks cannot return to normal banking unless the problem is addressed.
NAMA will tackle the problems of the banking system by stripping their most difficult classes of property loans as well as performing loans. The banks will take losses on many of those loans now rather than over time, leaving them cleaned up and better able to get on with normal banking business. The banks will be in a better position to raise funds for lending in the economy to small and medium businesses as well as the public.
The transfer of bonds from the State to the banks in payment for the loans transferred will give the banks greater access to cash through world markets and the European Central Bank. It is important to emphasise - in response to so much mischievous misinformation - that borrowers will owe NAMA the same amount as they owed to the banks concerned. Borrowers will be expected to pay the full amount owed by them in exactly the same way as they are obliged to pay their bank at present. With borrowers who will not or cannot repay their loans, NAMA will pursue them to ensure maximum return. Borrowers in most cases have lost substantial sums with the large fall in property prices, and where loans are not being repaid, borrowers face further losses as NAMA takes control of the underlying assets and collateral.
Many people are concerned that the assets, loans and property held by NAMA will not perform well enough to recoup its costs, including payments to banks.
The Minister for Finance, Deputy Brian Lenihan, stated:
The estimate is that 40% of these loans are cash-flow producing. The cash flow produced will be sufficient to cover interest payments on the NAMA bonds and operating costs.
In respect of the assertion that taxpayers will lose out, the Minister emphatically stated that the Bill provides for part of the consideration for the assets transferred to be in the form of subordinated bonds. If NAMA were to lose money, this would put the banks at risk without giving them an upside in respect of its gains. The Minister also stated, "If, on the winding up of NAMA, there is a deficit, the Government may impose a levy".
As is acknowledged by people on all sides in the House and those further afield, the banking system has let us down. I welcome the announcement by the Minister to the effect that existing structures cannot remain as they are at present. There have already been changes at chairman and CEO level in the financial institutions. There will be further changes at board level in the near future. The Minister said that any institution participating in NAMA will be required to restructure its operations and that he will insist that this will be a real process leading to a reformed and reinvigorated banking system.
In July, Mr. Bo Lundgren, the director of Sweden's National Debt Office, who was Minister for Fiscal and Financial Affairs during the Swedish bank sector collapse, which lasted from mid-1991 to 1996, met the Joint Committee on Finance and the Public Service. Mr. Lundgren has been quoted on numerous occasions as favouring nationalisation of the banks. A number, but not all, of the banks in Sweden were nationalised during the period to which I refer. When asked how long Ireland might need to get back to a solid banking system, he said it was difficult to judge and the timeframe would differ from country to country. However, he said that as Ireland's property market had probably bottomed out, the banking system should be in order within a year or two. He said that Ireland is roughly now where Sweden was in 1993. By that stage, Sweden was nearing the end of its financial crisis.
Mr. Lundgren further stated that the main challenges to meet to minimise a credit crunch emerging from a banking crisis are the maintenance of liquidity and the restoration of confidence both in investors and bank management. He added that restoring a capital base to what is needed at the time, even though it might not be to original levels, is vital. He said that a lack of credit flow is the main reason for any government to be involved.
Sweden's banking sector collapse – which lasted from 1991 to the middle of 1996 – although smaller than what Ireland has been experiencing, resulted in a mix of mergers between banks, nationalisations, liquidations and the establishment of two bad banks. The end result, however, was that most of the value of lost loans was recovered. In that context, Mr. Lundgren said that bad banks – such as the proposed National Asset Management Agency – should not be closed as soon as the sector recovers but should be kept in place for a few years to attempt to recover as many bad assets as possible.
Fine Gael wants this country to follow the example of the Lehman Brothers default-on-your-debt model and also wants to establish a new "magic" bank. Its plan does not even have the support of some of its former leaders. Deputy Kenny's new magic wholesale bank will supposedly obtain €2 billion in capital from the State and will be able to borrow €40 billion from the ECB. This is nonsense, particularly as the latter demands that collateral be provided. The magic bank would be obliged to raise deposits and these would almost certainly come in the form of funds withdrawn from the existing banks. Alternatively, the State would have to provide the magic bank with €50 million to €60 billion in bonds. There would be no benefit to the economy from this, particularly given that the banks already have access to the ECB.
Fine Gael also wants to establish legacy banks to force losses on holders of bonds. The bulk of bonds issued by Irish banks are ordinary senior bonds such as, for example, certificates of deposits. Senior bonds are: part of the banks' funding, not part of their risk capital; owned by pension funds, insurance companies and other long-term providers of debt, that is, the same investors who purchase Government debt; covered by the bank guarantee; and legally entitled to the same treatment as deposits. Defaulting on senior bonds would lead to funding for the banks and the State drying up.
Holders of subordinated debt - which forms part of the banks' risk capital - have suffered large losses as a result of debt buy-backs at deep discounts. The international experience is that the consequences of the failure of a bank would be to leave businesses and individuals at the loss of their savings, undermine confidence in the banking system in general and cause serious damage to an entire economy, which, if it were to be repaired, would require even greater state intervention.
The Labour Party's proposal copies the Government's plan in that it suggests the establishment of an asset management agency similar to NAMA but with a different name. Labour wants to impose a 50% discount on the loans being transferred to NAMA. It has chosen this number because a discount of this magnitude would wipe out the capital base of the entire banking system and the State would then be obliged to recapitalise the banks in full. This would achieve Labour's ideologically-driven goal of a fully State-owned banking system.
Labour's approach is in violation of EU Commission rules. The Commission insists that valuations must be determined following a due diligence examination of each loan. Under NAMA, loans will be valued individually. The EU Commission does not allow a flat discount across all loans as proposed by the Labour Party.
NAMA has the support of the IMF, the OECD and the ECB. The backing of the latter is crucial because it has agreed to exchange the NAMA bonds issued to the banks for cash. The ECB would not back Labour's proposal as it is in violation of EU Commission rules. The ECB also indicated that it is opposed to full nationalisation.
The Government has ruled out the full nationalisation of AIB and the Bank of Ireland on the basis from due diligence exercises undertaken in March and other information on expected future bank losses which indicates that full nationalisation is not necessary. Once an institution is completely nationalised, the State must sustain it. Anglo Irish Bank is a case in point. The State is obliged to ensure that the minimum capital is maintained in such an institution. If that is not done, the institution ceases to be a bank and all its liabilities become an immediate charge on the State and the taxpayer.
If AIB and Bank of Ireland were fully nationalised, shareholders would have to be compensated with cash from the State. At current share prices, this could mean a €5 billion cash payout. From where does Labour propose that the State should obtain this money? Such money would have to be found before a single cent of new capital were injected. New injections of State capital would have to be borrowed on world markets at interest rates of at least 5%. NAMA bonds pay a much lower interest rate.
Full nationalisation of AIB and the Bank of Ireland would impact negatively on the ability of the banks to attract funding and the cost of sovereign funding. Anglo Irish Bank lost €15 billion in deposits following its nationalisation in January and the Central Bank and Financial Services Authority of Ireland has been obliged to make up the majority of the difference through a special liquidity facility of €10 billion. This is because providers of funds - insurance companies, pension funds, and so on - have credit limits for each borrower to avoid excess exposure to one customer. Since Irish banks, if nationalised, would be regarded as part of the State, the individual credit limits for all of them and the State would be merged.
Full nationalisation would inevitably result in Ireland's sovereign credit rating being downgraded and the State would be obliged to pay higher interest rates on its borrowings. Moody's rating agency warned in recent days that the Government would have to deliver on NAMA or the country could face further cuts in its credit rating.
Under Labour's plan, banks would be delisted from the stock market. How does Labour propose that the State should sell off its stakes in the banks over time? When should these stakes be sold off? How would fully nationalised banks perform in the interim? Political interference in lending policy has a disastrous history worldwide.
Full nationalisation is the nuclear option and the only country that has fully nationalised its banks in the present crisis is Iceland. Did Iceland get it right and every other country in the world get it wrong? The NAMA proposal makes the Government responsible for providing funds to meet the banks' capital requirements. Nationalisation would require the Government to meet both the banks' capital requirements and their funding requirements. The Labour Party cannot cost its proposal and once the State was to assume complete responsibility for the financial sector, the cost could be endless. It is a high-risk strategy that inevitably would end up costing taxpayers even more and would undermine confidence in the banking system and the country as a whole.
In conclusion, I believe that what is needed is to get credit flowing for ordinary businesses and families, to create and protect jobs and businesses and to safeguard business systems rather than individuals. Moreover, the legislation for another regulatory system must be brought forward as soon as possible. I believe NAMA is the way forward and I commend the Bill to the House.
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.
There is no doubt this is the biggest gamble ever taken by an Irish Government and I have been struck in recent weeks by the Fianna Fáil grassroots line, echoed by the Tánaiste in reply to Deputy Kenny, to the effect that something has to be done. Something must be done but the right thing needs to be done. The right thing is not that which sees taxpayers foot the Bill for the greed and folly of a small number of people. The right thing is what sees taxpayers protected in so far as possible, although I understand this cannot be 100%, and those responsible for this situation take the greatest proportion of the burden. Having read the comments of the Taoiseach last week, there might be an inability to see what is best for the country and best for the citizens of the country. They ranked only second and third to the Taoiseach. Judging by the silence of the parliamentary party on this issue, we can assume the same principles apply to it. The Irish public cannot be blamed for being sceptical about what, rightly or wrongly, they feel is a bailout for bankers and developers when they realise that loyalty to Fianna Fáil is the guiding light of our Taoiseach and his Government.
Deputy Michael Ahern seems to know the party affiliations of all senior bankers, including CEOs. Is this because he asked to see their card on the way into the Galway tent? Obviously he is very close to them if he knows their party affiliations. It is important to dispel the myth the Minister for Finance tried to create last week in suggesting Fine Gael did not engage with the NAMA issue over the summer or by saying that Fine Gael did not take up the Government's invitation to discussions behind closed doors. I can understand the temptation to discuss this issue behind closed doors. One of the biggest concerns the public has with this legislation is the fact that it appears shrouded in secrecy.
Fine Gael engaged with the Government during the summer and set out its detailed concerns in writing to the Minister for Finance about NAMA as well as the Fine Gael alternative. We also suggested through our party leader and our spokesperson on finance that the Oireachtas Joint Committee on Finance and the Public Service should hear testimony from international and domestic experts on the positives and negatives of NAMA and the alternative viewpoints put forward by parties and other experts. We set out nine specific issues on which we wanted further detail from the Minister.
Deputy Bruton outlined clearly that our concerns arose from the potentially colossal cost of NAMA promising uncertain benefits and from the evident unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks. We remain concerned about the clear possibility of overpayment by Irish taxpayers to bank shareholders and bondholders for toxic bank assets with a highly uncertain value. The valuations provided by the Minister last week are short on specifics and short on certainty as to just how the figures were produced. Effectively, the Minister has made a series of assumptions on the value of property today and the potential value of property in the future. He has also made assumptions on how much property prices have fallen on the projects that are to be supported. Adding all these up he arrives at the figure of €54 billion, which is still highly questionable. Mr. Richard Curran undertook an interesting analysis of this at the weekend. Other property price reviews have shown different figures, some of which were mentioned by Deputy Noonan, and mostly larger figures for falling property prices. Indeed, many companies and brokers have written down the value of assets by significantly more than the figure the Minister is using in the supporting documentation supplied to us last week.
The Minister's assumption that NAMA would break even if property prices recover by only 1% per year is seriously questionable and is dependent on him being correct in his figures that property prices have fallen by 47% on projects. The Minister has little or nothing to back this up, except an 11 page report, the totality of which we are not allowed to see. We would need a far more startling recovery for NAMA to break even at any time in the next decade, possibly up to 50%, thus leaving the taxpayer dangerously exposed. The notion that there will be a 10% uplift in prices in a decade providing a break even position is nonsense. Fine Gael is also concerned and questions the impact NAMA will have on the current lack of bank credit for businesses and households. There is no doubt that this is one of the over-riding concerns of the public at this point in time.
In our day-to-day constituency work, particularly over the past few months, we have been struck by the massively growing number of people in dire financial straits. Every single clinic I have held across Laois and Offaly has had people come in who simply cannot afford to keep up repayments on their home. Many of these have applied for and have been refused help from the State to assist them.
The Government is able to refuse mortgage interest supplement to families on the verge of having their homes repossessed on the basis of the fact that they believe the person could never afford the mortgage in the first place or should not have taken the mortgage out in the first place. How does the Government set that beside what it is proposing to do here? How does the Government propose to explain to mothers and fathers facing home repossessions that the financial institutions cannot possibly be allowed to fail yet we are quite happy to let the financial institutions repossess homes and, no, the Government will not give any support to try to assist in paying the mortgage and staying in one's home?
I am currently compiling a report for the Joint Committee on Social and Family Affairs, with Deputy Thomas Byrne, on the high levels of indebtedness in Irish society. We have held hearings with many experts in the area. Mortgage borrowing in this country doubled since October 2004, with annual rates of increase of nearly 30%. Despite low interest rates, the High Court has seen a 100% increase in the seeking of repossession orders last year and is expecting an avalanche in the months to come, in the words of the master of the court. Luckily, according to Central Bank statistics, approximately 80% of our mortgage borrowing in Ireland is benefiting from the European Central Bank reduction in interest rates. The real concern this is masking is what will happen if the ECB rates start to increase or if, as the EBS warned last week, financial institutions start to increase their interest rates as a result of the cost of being involved in NAMA. We will then have an even greater number of people seeking relief, an even greater number being refused and an even greater number questioning why we are saving those who gave out these loans yet we are making no attempt to salvage the situation for individual home owners.
I welcome the one ray of hope that the code of conduct for mortgage arrears represents. Unfortunately, the Government omitted sub-prime lenders. This code has not addressed reckless lending by financial institutions. It is exactly this reckless lending that has led us to where we are with this legislation. It is ironic that we are going to support the financial institutions and the developers engaged in this level of reckless lending when the Government has no clear plan, if any plan at all, to support people who were offered loans on family homes that have proven unaffordable. They are just told that it is tough and that they should not have taken it out in the first place. We are not even resourcing organisations like MABS or the Legal Aid Board to ensure that people are able to get expert financial advice when they find themselves in this situation. MABS is doing good work but is neither staffed with enough people nor with people with the necessary expertise in this area to go up against the might of those in financial institutions whose job is to try to get as much money in as they possibly can from the small man. According to the Free Legal Aid Centres, the Legal Aid Board only took on four debt cases last year yet 276 people were jailed under the heading of offences relating to debt in the same period.
Unlike the Government, which is obsessed with the propaganda that there is only one solution, Fine Gael is not obsessed by this dogma. Fine Gael is guided by a set of core principles that this legislation does not address. We want to see legislation that protects the taxpayers from massive and unmanageable risks, that minimises and ensures a much fairer distribution of the losses associated with reckless lending by banks and reckless investments by developers, and with improving the financial stability and credit availability for businesses and families who are struggling at the moment.
I spoke to a businessman last week who runs a tight business that employs a small number of people and works extremely hard. His account was overdrawn by €56 recently and he was told by the bank that it was going to bounce his cheques. This is part of the reason we are seeing so many small businesses fold in the current climate. I know of other instances where banks have approached small businesses and have asked spouses to assign the family home in order to guarantee the loans the business had taken out. Surely this is a direct contradiction of what was achieved with the introduction of the Family Home Protection Act after the Bank of Ireland v. Smyth case in the 1990s, when the family home was finally secured. Obviously the banks will tell us that they will tell people to get legal advice but getting legal advice does not alleviate the emotional pressure on those running a family business if a spouse is asked to assign the home to try to help the business to survive. These are bullying tactics being adopted by institutions that we are now guaranteeing to support for generations to come.
The real concern I have about NAMA is the overexposure of the taxpayer to the risk. Everyone has a certain sympathy for shareholders, many of whom themselves were misled by the bankers. However, this does not change the fact that by its very nature investing in shares is a risk. The solution is not to transfer all of this risk to the taxpayers, the majority of whom did not invest in these institutions. We must adopt a model to see greater risk being retained by the bank and its investors.
An interesting aspect of NAMA is that it remains secretive even though it is funded by the taxpayer. As drafted, it will remain that way and the names of between 1,500 and 2,000 of the most powerful business people in this country will remain secret. The real difficulty with this is that we will not be told who they are or what sums relate to them and people are angry about this point. Virtually every sector that receives funding from the State, be it ourselves, doctors, pharmacists, solicitors or farmers through REPS and single farm payments have this information published and available. However, this will not happen in NAMA, which is unfair and a mistake.
The Government has made much of the fact that our economy cannot recover without a functioning banking system but it does not seem to place the same emphasis on how businesses and householders will have access to credit. In the Minister's speech last week, he stated that specific credit supply measures were incorporated into the Government's recapitalisation packages for AIB and Bank of Ireland. The Tánaiste could not answer questions on this today. However, 40% of the €54 billion to be spent on this will go into Anglo Irish Bank and Irish Nationwide and I do not believe there is any chance that either of these institutions will kick-start lending in the economy. Having listened to the Tánaiste today, I do not believe that people on the other side of the House believe that those two institutions will do so either.
I was struck by the fact that the Minister quoted President Obama on several occasions last week. Deputy Noonan was correct when he spoke about the tardiness of the Government on this matter. It makes the Minister's last quote from President Obama particularly interesting. This was on the need for nations to take early and aggressive action to get credit flowing again. This shows the Minister's thinking on this issue because there is nothing early about his action and while it may appear aggressive it will not achieve what he wants it to.
I am delighted to have this opportunity to speak. I speak for every Member of this House when I state that the proposed legislation to establish NAMA is one of the most important and complex Bills to come before the House for debate. Rightly, the discussion surrounding these proposals has been vigorous and intense, with every person on the island wanting to ensure that stability is restored to our banking sector, and the wider economy.
In the past year, Ireland has been at the centre of one of the worst international economic storms ever witnessed. This week, the G20 summit meets to discuss reform of the global financial sector, which has been rocked by banking scandals. I know that people are angry and worried, just as Members on both sides of the Chamber are, and they have every right to be. Action must be taken now if Ireland is to recover from this recession.
The Minister for Finance and his Department has examined in detail every possible option available to them. NAMA is generally accepted - not by everybody but rarely will we have unanimity on such complex legislation - as the best solution to restore our banking sector to a position of strength and it has received the support of the IMF and the ECB, with the ECB stating that measures in the legislation should restore confidence to the banking system.
A recent article in The Irish Times stated that NAMA was set to shift wealth to lenders and developers. I certainly do not believe that and if I thought for one minute that anybody felt that would be the outcome I would not support the Bill. NAMA is not, as has been suggested by some commentators, a "get out of jail card" for bankers and developers. Though many of us would like nothing better than to punish the banks by not assisting them, it would simply be a case of cutting off one's nose to spite one's face. Quite simply, without NAMA the Irish banking system would crumble, shortly and swiftly followed by the Irish economy and the many small and medium enterprises throughout the country.
The banking system is the heart of the economy. At present, it is not working at full capacity and is not pumping much needed finance and cash into the economy, which it needs to stay healthy. What do we do? Do we simply allow it to fail, or do we perform an operation such as NAMA which may not be 100% risk free, but which will restore the banking system and the economy to full working order?
Without a functioning banking system, the economy will not survive. Families will struggle and businesses will fail. The previous speaker spoke about a bank seeking €56 from a person. This is the very reason we need NAMA; we need to be able to ensure that the banks can extend a certain degree of flexibility in loans. There is nothing surer than that NAMA is the only option to restore stability to our banking sector. The proposals for NAMA centre on two key points: buying bad loans at a discount and injecting capital into lenders with the aim of restoring solvency into the banking sector. This will allow banks to once more free up lending to Irish businesses currently deprived of working capital.
Over the summer I met representative bodies of a number of business associations to discuss the main challenges facing their members. Repeatedly, access to credit was listed as the main concern for Irish SMEs. NAMA will, by cleansing the banks' balance sheets, allow the banks to access cash to lend to businesses. However, I know that there is deep concern that banks will simply sit on these funds and not pass the finance on. Over the past five to seven years they borrowed heavily from foreign investors to help fund loans to property portfolios and there is concern that the money will be used to repay these foreign investors prior to being lent to the economy. This concern has been highlighted by the ECB, which stated that the banks involved in the scheme must be monitored to "ensure that their self-interest does not cause them to focus on preserving and rebuilding their own equity, instead of lending into the economy".
In his address to the Dáil last week, the Minister for Finance highlighted the commitment in the NAMA Bill that banks will increase their capacity for lending to the SME sector by 10%. When amendments are being considered I ask that this commitment be clarified. Unfortunately, although the same commitment was given when the banks received the Government guarantee last year, the experience of SMEs would tell a different story. Though no one would suggest that a business that is not viable should be given funding simply because it seeks it, good businesses in operation today are being denied the credit they need. We must ensure the banks do not pay off their foreign investors first but that a percentage of the money coming from the ECB goes to the economy. From experience, we cannot trust the banks to deliver. There must be a mechanism and, as the Minister stated, there must be reform of the culture in the banking system. The Minister has provided this by cleansing the boards and this must continue. That cultural change will ensure that the money goes to people and to small and medium enterprises.
Earlier this summer I voiced my support for the Mazars proposal that a risk-sharing scheme be established for SMEs and I again propose that this be considered. Furthermore, I note with interest a proposal by the CPA that a condition be placed on the banks to ensure at least 25% of the €7 billion premium due to be paid for NAMA loans in accordance with long-term economic value will be allocated to new working capital credit facilities for viable SME businesses. I suggest this proposal be given serious consideration when reviewing the legislation and that it be tied into it on a statutory basis.
Ireland faces unprecedented economic challenges on a scale never before experienced and this Government has chosen a course of action to meet these challenges, which I fully support. The Opposition has a duty and a right to question the Government on its decision-making process, however the time for proposing alternatives has passed. Its duty to the people now is to work constructively with the Government parties to ensure the best legislation possible is passed.
Ireland does not exist in a vacuum unseen by the rest of the world - a fact the Opposition seems to forget. The international financial community is watching Ireland closely and it is critical that political point scoring is cast aside and that we work collectively to steer the country through this economic storm and these exceptionally difficult times.
There is a phrase that familiarity breeds contempt; there should also be a phrase that pessimism breeds pessimism. I do not for one second underestimate the seriousness of the situation we face. However, it is paramount that Ireland Inc. send a strong and united message to potential investors that we can and will get through this and that Ireland is open and very much ready for business. The very nature of our economy and our small size means that we are heavily reliant on international investment and a united, clear and decisive plan is the best way to reassure potential investors that Ireland is a safe place to invest.
Any idea that builders will escape the consequences of their defaulted loans is a fantasy propagated by the Opposition to garner easy headlines. A borrower who owes €1 million to a bank before the loan is transferred to NAMA will still owe €1 million to NAMA after it is transferred. The Minister for Finance has assured this House that they will be pursued for every cent. Any idea that borrowers will escape their obligations solely by having their loan transferred to NAMA is simply false.
This Government has chosen a course of action. It is a daunting task but our resolve to restore the Irish economy will not be shaken. Every effort to protect the taxpayers and future generations has been taken and now the plan must be put into action. Ireland can, and will, recover and NAMA is the first step on this road. I commend the Bill to the House.
I welcome the opportunity to speak in support of the NAMA legislation. I wish to set out why I support the concept of NAMA and explore some of the ridiculous myths which have been peddled about the NAMA project during the course of the frenzied public debate over the summer.
It is high time for us to address the grave difficulties besetting the banks. We must address them with an air of plain realism, unpalatable and all as that reality may be. There is no instant panacea for this crisis. We must adopt a practical, structured and workable approach which pays proper regard to the context in which we find ourselves from the points of view of the European Commission, the European Central Bank and the international financial markets. We are only deluding ourselves if we believe we can operate in a vacuum on this. All our actions to do with the banks and how we propose to clean them up will have knock-on consequences in the markets and we must be constantly mindful of that fact and of the profound long-term effect all our policy decisions will have. The key issue is to repair the banking system and to maintain international confidence in investing in this country while ensuring the taxpayer is not unduly exposed.
Whether we like it or not, we all need banks. They are a fact of life. Banks which function properly are critical to a vibrant economy and represent its beating heart. Credit is the lifeblood which maintains every facet of the economy. It enables business, it facilitates enterprise and it keeps the household going. Now that we have experienced a banking crisis and the near collapse of the entire system, we know what it is like when credit dries up and most of us know that it is a very uncomfortable and debilitating situation.
The former beating hearts, which are the banks, are now going through a type of cardiac arrest and business is withering because it cannot get access to vital credit. Enterprise is nearing stagnation, farmers cannot get loans, young people find it difficult to get mortgages, households are unable to get loans for purchases or improvements and individuals cannot get personal loans or overdraft facilities. The banks simply cannot lend because they do not have the money to do so. There is an acute shortage of cash and people are losing jobs at an alarming rate.
That situation is intolerable and dangerous and cannot be allowed to go on much longer. There is a dire urgency about this. The banks are paralysed because they are seriously choked up with all these toxic loans so we must take corrective action. I am afraid we do not have the luxury of choice or time. It is my firm and honest view that an asset management agency represents the best formula to tackle this problem in a comprehensive way. We must restore a functioning banking system which will ensure a flow of credit into the real economy. If they are to survive and do the job they are supposed to do, the banks must get a clean bill of health, their balance sheets must be strengthened and all the uncertainty surrounding bad debts must be reduced.
The Minister for Finance is to be complimented on the model he is recommending. It is worth reminding people that this model is not unique. Around the globe, similar models have been adopted to deal with distressed loans in banks and the Minister has availed of the very best international and domestic advice and expertise in formulating the NAMA proposal. NAMA has received the very important blessings of the European Commission, the European Central Bank, the OECD and the International Monetary Fund. In formulating the best vehicle to resolve our problems, the Minister has adopted a measured and considered approach, based on the principles of best international practice.
NAMA has enormous merit in that it addresses the two most critical issues confronting the banks at present, namely, solvency and liquidity. Throughout this process, we must achieve the orderly disposition of assets and ensure the various developments in question continue to earn economic value over time. It is without doubt the best and most workable solution we have and it has a proven track record of success internationally. Around the world, it is consistently recommended by banking experts and economists as the most effective method of managing distressed assets and troubled loans in a fragile banking system.
A number of schools of thought emerged over the summer about how we should clean up the balance sheets. Much of what passed for honest debate only served to confuse the public and that opportunity was used very cynically to distort the truth about NAMA, what it seeks to achieve and how it will set about its business of cleaning up the banks.
First and foremost, NAMA will acquire all the loans secured on properties and other assets. It is not only buying the bad or non-performing loans. Furthermore, we must bear in mind that 40% of these loans are good loans, that is, the borrowers continue to service these loans and they are not impaired. That fact has been lost or ignored in much of the controversy which has been generated by academics and the like.
I am disgusted that NAMA has been deliberately depicted as a bailout for builders and developers. It is nothing of the sort. To suggest otherwise is to fail completely to understand NAMA and how it will work in principle and in practice. The legal obligations of borrowers do not change in any way simply because the loans are transferred to NAMA. It is NAMA's clear objective and duty to continue to manage these loans and to ensure that all the obligations of the borrowers are met in full. Indeed, the Minister has said on several occasions that NAMA will be ruthless and relentless and will pursue every borrower, builder and developer alike, for every last cent they owe. All borrowers will continue to owe what they owe until their debts are discharged in full and that is the way it should be.
This Government is most certainly not in the business of rewarding failure or reckless borrowing and nobody but nobody will escape their legal and moral duties to the State. They will continue to be liable for the entire face value of their loans and I heard the Minister state that he will consider pretty far-reaching penalties against any builders or developers who might default on these loans. I hope the Minister will pursue this and that, if it is lawful, he will consider measures to curtail their future involvement in the building industry.
The Minister's attitude in his preparation of this legislation has been commendable and mature. He has shown himself at all times to be amenable to proposals and possible amendments from the public and parties in this House. He has engaged in a constructive process of consultation and dialogue with all interested people which is a very enlightened and pragmatic approach to such a fundamentally serious issue. I hope the Opposition parties will respond and avail of the opportunity when this Bill reaches Committee State to put forward meaningful and concrete proposals to improve on the structure and the process which the Minister seeks to adopt in the nation's interest.
In this respect, I welcome the proposal to introduce a substantial element of risk-sharing into the legislation.
It is entirely fair and reasonable to apportion risk to the banks and to avoid any possibility of enriching shareholders. After all, it is the banks' shameful and naked avarice which has visited so many problems upon this nation and the ordinary taxpayer. The banks engaged in a wild orgy of irresponsible and unscrupulous lending in the past several years. Their behaviour and singular lack of any ethical standards are despicable and have served to compound many of the problems this recession has brought.
Not alone do I support the notion of risk-sharing for the banks if NAMA does not succeed fully, but I am also anxious to ensure the full rigours of the law are applied to all of those bankers who are found to be in breach of their duties. I hope the Office of the Director of Corporate Enforcement will be able to bring successful prosecutions through the courts against all of those who have violated the law in pursuit of profit, satisfying their naked greed without any regard to the catastrophic consequences of their wilful deeds. In a nutshell, I want to see them serving severe jail sentences where necessary. We are all suffering the hangover which their scandalous orgy of greed has inflicted. Risk-sharing is appropriate for the banks and custodial sentences are appropriate for those proved to have been engaged in criminal or fraudulent activities.
I welcome that the Government is still considering the option of applying a levy on future profits of the banking industry to make up any shortfall if NAMA fails to break even over its lifetime. We need a strong element of justice and fair play for the tax payer in this entire process.
I have been disappointed by the tenor of the NAMA debate and the lack of any viable alternative being put forward. There has been too much heat and not enough light in this discussion. Ideas have been high on aspiration but sketchy on cost and detail. In typical fashion, the Opposition has a problem for every solution. It is noteworthy that a former Fine Gael Taoiseach, Dr. Garret FitzGerald, and former party leader, Mr. Alan Dukes, have come forward in favour of NAMA, as has Mr. Ray MacSharry and many other prominent and respected business leaders, economists, and commentators.
The Financial Times is well-disposed to NAMA. The current edition of The Economist describes the NAMA plan as seeming, "like an advance over those in some countries—at least it gets something done. America's scheme to buy toxic assets never got off the ground, while Germany's bad bank is so punitive that most banks would rather stop lending than turn to it for help."
People are going through painful times as the ravages of recession and unemployment continue. Our priority is to reverse the negative trends. It is a harsh fact that our economy will not recover until the problems preventing the banks from lending money are resolved. NAMA is our best option. It will get credit flowing again in a way which will minimise the risks to the taxpayer and to the economy in general.
I support the passage of the NAMA legislation through the House. I hope it will revive the economy and get us back on our feet.
Put simply, the NAMA figures do not stack up. The first question to be addressed is whether this is a good deal for the taxpayer. The best independent advice that I tend to rely on is from The Economist, already quoted by Deputy Aylward, which has a record of serious warnings over many years about the dangers of the Irish property bubble. On the NAMA plan it recently stated, "the Government seems to have erred on the side of favouring shareholders, largely to minimise the amount of capital it would have to inject into the banks" and "NAMA will still pay about €7 billion more than the assets are actually worth." It seems clear the taxpayer is expected to carry far too much of a burden for this bank rescue operation.
I question the estimated current market value of the assets being acquired by NAMA at €47 billion. The Minister for Finance, Deputy Brian Lenihan, referred to the accompanying documentation, the Green Book, to see how this figure was calculated. I do not have much faith in the valuation methodology. What is clear, however, is that the proposed valuations are largely based on commercial property yields whereas a significant amount of the property is development land that may never yield anything other than if it reverts to agricultural use. In the end it will be a matter of judgment for the valuers which will decide the figure for each asset.
I well recall the controversy several years ago when I seriously questioned and strongly objected to what was presented by the then Government as the market value of the property being acquired at Thornton Hall. A figure of €200,000 an acre was paid for a property which I, and many people whose opinion I respect, valued at €25,000 to €30,000 an acre. This involved the taxpayer funding a purchase by the Government at a figure of €30 million of a property which was probably worth no more than €5 million. Taking into account this record on valuation, there will have to be a hard cold appraisal with total transparency on the valuation process.
The concept of long-term economic value is something I never encountered in many years of practical experience of dealing with property. Market value has always been the price agreed between a willing seller and a willing buyer. In that equation, likely future trends are factored in by both seller and buyer. Beyond that the Government is talking of over-the-rainbow values. It suggests the annual average increase provided for is modest enough but who knows whether current values are at their lowest and what will happen in the years ahead. Neither has any account been taken of the cost of financing in the meantime, inevitable substantial interest rate increases or of the cost of maintaining property.
If there were gold at the end of this over-the-rainbow approach, the taxpayer should now be making an advance payment against that possibility. The Minister for Finance claims he is providing for the banks to take part of the payment by way of €2.75 billion of subordinated debt. Is there any reason, in fairness to the taxpayer, the banks should not carry the entire €7 billion uplift from market to long-term economic value by way of subordinated debt?
The Minister has argued such an approach could result in a greater capital requirement for the banks. In an unscripted comment when he spoke on the Bill he said,"The capital would require to be provided and have to be borrowed on world markets at current rates of 4%, far in excess of the 1.5% with which this paper can be traded in world markets". However, he seems to have been comparing financial apples and oranges since the 1.5% money is short term for three to six months money whereas the 4% relates to three to five year money.
An alternative approach might be for the State to underwrite a substantial rights issues by the banks but only at approximately 50 cent per share. Bank shareholders would not be too pleased with such an approach but, at the same time, such a rights issue would have a substantial uptake. The banks' share prices would subsequently appreciate substantially in time giving rise to major gains for the taxpayer in respect of any portion of the share issue taken up by the State.
I very much question the dependency created by NAMA being a continuing subsidiary of the National Treasury Management Agency. These are clear grounds for conflict. If NAMA is to proceed it may need to make unattractive decisions affecting lenders to the banks. The National Treasury Management Agency may be conflicted by virtue of its continuing relationships with lenders to the State and agents of lenders to the State.
If NAMA is to proceed, the language under section 2(b)(i), "to facilitate the availability of credit in the financial markets in the State", should be amended to "facilitate and direct in NAMA, or through participating institutions, new credit to high-quality persons and SME borrowers through the establishment of a department of NAMA devoted to such cause." This would go some way towards achieving the objectives behind such proposals in the absence of the national recovery bank as proposed by Fine Gael.
Many issues will arise on the legislation itself but one in particular stands out on its constitutionality, or lack thereof. According to the Bill as drafted, if NAMA wants an acquired property sold on and wants to add in or create rights over adjoining land, it has the power to do so even though the owner of the adjoining land has no borrowing on it and is not involved with any bank or NAMA. I foresee such an owner who objects to such a takeover going all the way to the Supreme Court on the issue and the protection of his rights which should not be affected.
The Minister for Finance has provided for an extraordinary range of powers for himself under this Bill. Under 50 of the sections, nearly a quarter of the total, the Bill provides for different powers to be exercised by the Minister. Many of these powers are appropriate for the Minister while many are not. This situation reinforces the case for an independent oversight body. I have long held the view that there should be a separate Oireachtas committee with powers at least equivalent to those of the Committee of Public Accounts, preferably even stronger, and similarly chaired by the Opposition to oversee banking matters. If the Government proceeds with NAMA it reinforces the case for such an approach.
NAMA is like the emperor without clothes or at least with clothes that are not made to measure. The NAMA figures do not stack up. The prospective cost is too high for the taxpayer. There should be a rational, balanced debate on this Bill. Our aim should be to ensure that the exposure of the taxpayer is the minimum amount to get the banking system working again. That will require a balanced approach with bank investors taking the main losses. That is fundamental to the Fine Gael approach in this Bill. If that approach is followed the exposure of the taxpayer will be minimised. There must be some exposure but we want to ensure that it is minimised. This Bill does not achieve that objective or the balanced approach I have outlined. That is why I cannot support the Bill.
I thank Deputy O'Keeffe for sharing time with me. Over the past seven years many prominent economists, financial commentators and my colleague Deputy Richard Bruton repeatedly issued warnings about the property bubble which went unheeded and were even derided.
The Taoiseach and other Ministers have regularly reminded us that "we are where we are". We must not forget, however, that the current proposers of NAMA put us where we are today, and claim that they can get us out of the mess they created. Successive Fianna Fáil-led Governments worked hard to get us exactly where we are and to put the economy into its present mess.
Now the Government proposes that the taxpayer take on all the liability of correcting the wrongs of successive Fianna Fáil led Government and out-of-control and unregulated bankers. The Minister has made two arguments for this Bill, that we cannot renege on the subordinated bond holders and that NAMA will get capital flowing in our economy. These subordinated bond holders are in the main hedge fund managers who run high risk-high return funds. They gambled on the Irish economy, and now that they have lost, the Government wants us, the taxpayers, to refund their bet. That is what this Bill asks us to do.
The other stated objective and main goal of NAMA is to get capital flowing into the economy. It will not succeed in that. The proposals that Fine Gael has put forward to establish a good wholesale bank will achieve that objective. It will be at least the middle of 2010 before the acquisition of the assets by NAMA will have any impact on the lending capacity of the banks. There is no guarantee that these funds will flow into the economy and support existing employment or create new jobs.
The Minister for Finance claimed here last week that the 1.5% interest rate will force banks to lend. He has failed, however, to acknowledge that he has already lent money to the banks through preference shares, through recapitalisation funds at 8%, with warrants giving the Government the right to convert these to ordinary shares if the banks do not redeem them in accordance with the terms and conditions as stated. There is nothing in this legislation to prevent the banks from using the NAMA cash to redeem the preference shares, thus avoiding the payment of the 8% annual interest rate and ensuring that they make a tidy profit of 6.5% per annum. The incentive is built in to redeem those preference shares the Government has already taken.
As numerous speakers on all sides of the House have stated there is nothing in the legislation to stop the banks redeeming other longer-dated loans or more expensive financing already on their books. There is no guarantee that this money will make capital flow.
One of the most galling provisions in the Bill is that NAMA, and as a result the taxpayer, is taking over the cost of the repulsive bonuses and pensions paid to the directors of the banks who placed this country on the cusp of insolvency. In normal circumstances, when a bank sells a loan asset, or a participation in a part of a transaction on its books, to another bank, the buyer, NAMA in this case, would look for and expect to receive a portion of the original arrangement or up-front fees charged to the borrower for putting the facility in place. I have no doubt that with regard to all of the large facilities now up for transfer the original lenders had charged high up-front or arrangement fees which would have gone straight to the banks' profit and loss accounts. In the good times the banks would have generated large income from these fees and at least some of this was paid out in bonuses to senior management and directors of the banks. The Minister and NAMA must at the very least take such fees into account in pricing the assets and make an appropriate deduction from the price.
I understand the total cost of various fees, expenses of various kinds with the drawdown of the loans capitalised at time of drawdown, could be anywhere from €0.5 billion or more. That is a substantial sum in fees charged on these loans. To compound that insult for which the taxpayer must foot the bill the NAMA legislation provides for the payment of bank fees for managing those toxic loans to the banks which made them. The bankers will receive bonuses for managing those toxic loans so they will be paid on the double, having got their bonuses when they made the loans to developers. They knew at the time that they were risky loans and now we will give them additional fees and bonuses to manage those bad debts.
The biggest flaw in the Bill, from the point of view of the taxpayer, must be the omission of any provision to deal with the steps taken by developers to avoid their obligations given to the credit institutions by way of guarantee. We have all read in the newspapers over recent months about certain developers or their corporate entities transferring properties which were held in their sole names, or were perhaps jointly held with their spouses, to the sole names of the spouses. This has been brought to the attention of the Minister for Finance and his officials.
In the Companies Act 1963 there is specific provision for the transfer of assets prior to the liquidation of a company. This can go back to the preceding six months and covers any assets disposed of preferentially or any other assets that may have been available to the company. There is no provision in this legislation for the disposal of such assets. On 7 April the Minister announced his plan to introduce NAMA. Since then he has made no attempt to close off that loophole. Since 7 April, developers were given fair warning to transfer the assets out of their names, namely, those guaranteed assets that were given to the banks to ensure that they are not available to NAMA. They can then draw upon them when the liability arises at some future date. It is vitally important that changes are made to this legislation similar to those provisions made to the Companies Act 1963 to ensure these assets can be clawed back for the tax payer.
My final point relates to the issue of risk sharing. The Green Party claims that the provisions which were made regarding the new subordinated bonds will ensure that the banks will take part of the risk if the loan portfolio does not work out and if NAMA ends up losing out, as I believe it will. What really frustrates me is that the structure proposed in the legislation means that participating banks, some of which have good loans included with the bad, and responsible banks that have ended up in difficulties regarding some of their loans which are now to be put into NAMA, will be lumped in with the likes of Anglo Irish Bank and Irish Nationwide. These had extremely dodgy loans. The subordinated debt is structured in such a way that it is the overall performance of the total NAMA portfolio, not the performance of the individual proportions of that portfolio that have been handed or sold to NAMA by the participating banks, which will define the redeeming value of those subordinated bonds. It will cover up the bill for the likes of Irish Nationwide and Anglo Irish Banks whose bad loans must now be footed by each bank, even those that have been responsible. Surely a better way to ensure that the taxpayer is protected would be for the taxpayer to take out ordinary shares in the banks. If these then increase in value at least we will get some benefit from it.
I am sharing time with the Minister of State at the Department of Enterprise, Trade and Employment, Deputy Billy Kelleher, who will take over the debate tomorrow. I very much welcome the opportunity to contribute on this Bill. I commend the Minister on publishing draft legislation as far back as 30 July, since there has been a very good debate, on the airwaves, in the print media and at the very long committee meeting some weeks ago during which the Minister gave details and answered many questions on the draft legislation. It is fair to say that since then there has been much discussion on the legislation in every part of the country.
I was glad about one thing the Minister did at the outset of these difficulties. He introduced a State guarantee to the banking system which will be there until September 2012 and this got the support of many Deputies in the House. Many of my constituents and others throughout the country were very concerned that there would not be a guarantee, especially for those who had savings in the financial institutions.
Unfortunately, the greed that existed has led to many difficulties. There was greed in the banking sector and among developers who believed that prices would continue to increase forever. I did not know much about this and was not one of those who made prophecies about it. Some years ago when I could see that powers were being taken away from the traditional bank manager's role I made a suggestion. I spoke about rural Ireland in particular, where it seemed that the authority to sanction loans was taken away. I saw many branches of the financial institutions closing down. They were not closed because they were losing money but they were not making enough money to suit the CEOs and the people in the board rooms. I offer the example of a modest service which closed down, the mobile Bank of Ireland in Connemara. The Bank of Ireland in Glenamaddy closed and people were told to go to another county, Roscommon. Allied Irish Bank in Mountbellew was closed. It is very difficult to say to people that we want the banks to do business, to lend and have credit flowing when at the same time we see branches closing down and the whole banking structure moving farther and farther away from people.
Not long afterwards the Permanent TSB announced that it too was doing away with its agencies, some 48 nationwide, eight of which were in County Galway. We now have three left in the city and every other town and small village has lost the agency for Permanent TSB. The ACC acted similarly and 16 jobs were lost in Tuam. At a time when we are trying to hold on to jobs it is really disgraceful to have job losses in a situation whereby the ACC moved its business to Galway city. It is sad that the city has to gain so much at the expense of the smaller towns. If we talk about getting the entire banking system moving again we should look to hold on to these branches and agencies. I praise the credit union movement which seems to increase its branches and its numbers. The credit union is certainly more accessible for people who want to do business with it and long may that continue. The credit union movement has the flexibility to open at times our banking branches are not open.
I was glad to hear the Minister state that we are trying to get the banking system moving again. He talked about how the recapitalisation of the Bank of Ireland and Allied Irish Bank went ahead and the nationalisation of Anglo Irish Bank took place. We needed to do this because banks must have the funds to lend. NAMA will be able to attract more funds from markets and we will be able help funding, which is a serious issue at the moment. Any uncertainty about the banks' balance sheets will be dealt with under this legislation.
We received support from the European Central Bank. Banks receive bonds that can be cashed at the ECB or on the world markets. At a time when we are told we are borrowing €400 billion a week, or €57 million a day, to keep the country going, it is important that we have the facility to be able to deal with the European Central Bank. That should be borne in mind by people who are thinking about which way they will vote in the second Lisbon referendum on 2 October because we must ensure we will be able to get those loans at a very good interest rate.
When we spoke about having a banking system that is moving farther away from people, I thought of the rural transport scheme we have been discussing in our constituencies in recent times. For many years people got free travel and did not use it because they were not able to avail of the services. However, when the service comes under threat thanks to the McCarthy report people say, "My God, are we going to lose something that we are just beginning to get used to?" I hope that will not be the situation with regard to the smaller branches of these banks, building societies and other financial institutions.
The Minister spoke of the need for stimulus in the economy via the banking system. NAMA will deliver that stimulus. It is not bailing out the banks but is buying loans at a discount, as the Minister explained. The banks and their shareholders will have to accept losses. We should also say that NAMA is not bailing out builders. It will move against any borrower who will not or cannot repay loans. Borrowers will owe NAMA the same amount of money they would have owed the banks. The Minister for Finance has kept a very cool head during this debate. It has been a very difficult time.