Rather than reading out, as Ministers do, a speech praising our side and criticising the Opposition side, it struck me that we might, for a change, consider what people are saying. Like most Members of this House I have received hundreds of e-mails recently and I have tried to engage in a dialogue, through the e-mail system, with my constituents and with people from far and wide who have concerns about this issue. Many people have deep concerns about the National Asset Management Agency, as they have about the banking system.
The questions that arises time and again are: Why do we need NAMA, and why not let the market visit its vengeance upon those in the banking system and in the development world who behaved in a profligate manner? The answer to those questions is simple. To protect jobs we need an economy that is growing and an economy cannot grow without a functioning banking system. Whatever views we might individually have about the people who have been at the top of the banking system, and, like many people, I am very angry about the manner in which they operated, everybody is agreed that we must address the health and stability of the banking system before we can start making progress. Risky loans in our banking system are restricting the flow of credit, as we all know, and there is no credit for ordinary business people in every part of the country. I was in the Leas-Cheann Comhairle's constituency and people were talking in the streets about this very issue, to the effect that the banking system is not functioning, credit is not flowing and people are suffering as a consequence.
Irish banks rely heavily on financial institutions abroad for funding but the scale of the losses in banking would make this liquidity more difficult and therefore make the entire process of recovery more difficult. It would also make borrowing and interest rates much more costly. In addition, if banks remain unsure about the losses that will eventually result from these loans, the nervousness about the adequacy of the capital that will provide future credit will not be dispelled and future credit will not be available.
The asset management approach is not an entirely new approach, which many people appear to believe. It is an approach that has a track record. By establishing the National Asset Management Agency Ireland can tackle head-on the significant threat that impaired assets pose to the Irish financial system. The establishment of NAMA has been supported by the European Union Commission, and we all heard Commissioner Almunia express his views in recent days. It has also been supported by respected institutions such as the International Monetary Fund and the European Central Bank. I make this point simply to emphasise that the commentary to the effect that this is a sinister attempt to bail out bankers or, worse still, to bail out developers and habitués of a tent in Galway does not add to the debate and is doing something of a disservice to the general public.
The financial markets have already responded positively to NAMA. The question that arises is how it will operate. That question has been asked time and again in e-mails and messages to me, the Members opposite and every other Member of the House. As I said, the idea is not a new approach. NAMA will buy land, development property loans and certain associated loans from the banks at prices that are well under the current book values of those loans. NAMA will start with the largest systemic exposures across the institutions and it is expected that by the middle of next year, most of those loans will be transferred. The system can then start getting itself back to normal. NAMA will leave behind smaller, cleaner and better funded banks that can focus their resources on their core function of lending to a productive economy. I would hope that at that time we can also start talking about real regulation that will ensure we do not go back to where we came from.
The most common assertion is that NAMA is a way of bailing out greedy bankers, and it is understandable that members of the public should have that view. People who have been treated less than respectfully by banks would be less than human if they did not wish to visit their wrath upon bankers and banking institutions. The reality, however, is that the majority of people who work in the banking system were not responsible for the current position. There was a core at the top, and there is no doubt there was a rotten culture there, but we cannot visit our wish for revenge on every member of the banking fraternity, nor can we visit it upon everybody who has made investments in banks over the years.
NAMA will not be permitted to operate as a bailout mechanism for anybody, and certainly not for anybody who has behaved or operated irresponsibly. The important point, which is repeated time and again but lost sight of in the shouting and hectoring, is that NAMA will treat those who took out those development loans and related loans as borrowers who will continue to have the full amount of their loan due for payment. They will have a duty to maximise taxpayers' returns.
Nor is NAMA a builders' bailout, as is often suggested in the heat of political debate. The complaints by the Construction Industry Federation suggest that NAMA is not seen by it as a bailout. Recent well publicised comments by a leading developer attest to that. NAMA has been designed to ensure a properly functioning financial system, with funds available to lend to sustainable businesses. A properly functioning system will provide access to credit for completion of worthwhile projects.
Whether the banks are getting off scot free is another issue which has exercised the minds of many people but they are not getting away scot free. The legislation includes a risk-sharing mechanism that will protect the taxpayer from overpayment of assets to be transferred to NAMA. The legislation also provides that if NAMA should make a loss in any given year, it will have the option of not paying any interest or coupon payment on the debt concerned. That is a provision we should all welcome but I do not believe it has been properly debated.
In addition, there is the question of the levy. I am pleased the Minister for Finance has made it clear that a levy will be introduced purely as a precautionary measure. The levy is the final insurance that the taxpayer will not be visited with the costs of profligate behaviour by bankers or builders. Although it is not expected that the levy will have to be used, if it does have to be used, it will ensure that the taxpayers do not pick up the full cost.
I was surprised recently by the comments of Professor Joseph Stiglitz, the distinguished American economist and Nobel prize winner from a number of points of view. Although I am familiar with his work, I regard any economist coming from the United States where there was such an extraordinary meltdown, making the comments that he made — the suggestion that it should be just left to the market to clear up matters — as proposing a very odd approach. Anybody who is conscious of the recent experience of US finances, particularly in the money markets, would not reasonably come to the conclusion that letting the market take its course is the best solution. All we have to do is reflect on what happened in the case of Lehman Brothers. Lehman Brothers was allowed to collapse because that is what the market dictated but the reality is that the cost of letting Lehman Brothers go has run to trillions of dollars. I am not sure that many people with the benefit of hindsight would argue that was necessarily the best approach.
The important point is that NAMA will not pay above the odds for impaired loans. That was part of Professor Stiglitz's argument. The European Commission would not allow NAMA to overpay for assets as it would be a violation of EU state aids. That does not mean that NAMA will pay only current market values which, under current stress market positions, would imply fire sale values because a fire sale would not be the best approach.
In citing the comments of people from outside this country, people have conveniently overlooked what Ben Bernanke has had to say. He had a distinguished record in the Federal Reserve. He made the point that a fire sale approach to assets in the distressed banking system is not the best way forward. In fact, he suggested that it was a mistake. Like other governments around the world, we reject the idea of forcing distressed assets to be unloaded on to a market that simply cannot handle them. That is the reason the EU framework is more supportive of the NAMA approach. The European Central Bank has said that the allowance for long-term economic value should not be unduly large but it favours the long-term economic value approach. Logically, it is the only approach that can be adopted. The estimated cost of the long-term economic approach by NAMA is €7 billion, as has been repeatedly pointed out by Deputy Burton. NAMA will have to achieve less than 10% of an uplift over a decade to cover that cost and that point has not been factored into the debate. The Central Bank has indicated that the allowance "does not seem out of proportion with the range of potential upward price movements, especially when a risk-shared element is included".
There are measures that will mitigate the risks to the taxpayers which are worth repeating. First, there will be a part-payment in the form of subordinated debt. Second, payments will only be made if NAMA is making a profit. Third is the level of State ownership, as the State already has warrants equating to 25% of Bank of Ireland and Allied Irish Banks, and it fully owns Anglo Irish Bank. There are also building and mutual societies involved. In view of this the taxpayer has a substantial stake in the agencies being supported. There is also the issue of the levy.
The common good is not served by trying to avoid unpopular political decisions. The argument made here and outside this House that we can simply walk away from this is not based on any economic analysis. The reality is we cannot do that and we must deal with the issue, whether we like it or not. If we have views about banking and builders and whatever they are, the matter must be faced as the common good of the country requires a return to economic growth. Such growth will only come about if we can create a banking system that will have credit flows. The NAMA approach seems to be the best and most viable approach to creating credit flows and helping viable businesses.
One of the most contentious issues in the e-mail traffic we have all received is the question of valuations. The basic premise for the valuation framework is that NAMA is paying significantly less than the book values of the loans — some €54 billion compared to a book value of €77 billion. That represents an estimated aggregate discount of 30%. The point must be made that the final figures are not to be established until we have had the analysis of each individual loan. The estimated market value of the loans currently stands at €47 billion, and this is based on certain assumptions and information about the property market, including a fall in average property values in the State of approximately 50% since the peak at 2007. That is not an unrealistic assumption.
The current estimate of the allowance for the long-term economic value is €7 billion, and each loan must be valued individually. Each loan, including the value of collateral and securities associated with it, will require a separate valuation once the Act has commenced, so the final figure may be different from the €7 billion figure which has been repeated so often and stridently, particularly by Deputy Burton.
As each loan must be valued individually in accordance with valuation methodology, the estimate of the price to be paid for the assets which is being broadcast and which has been used in the debate so far is provisional. Not a single cent will be paid for a loan until it has been subject to a thorough due diligence examination. The ultimate value to be paid is defined with regard to EU guidance on the long-term economic value. It is worth putting these issues on the record because there has been a misinformed public debate. It is easy to understand why this has come about because there have been strident arguments put forward without much logic applied to them.
Another question which is posed in many people's minds, and going back to Professor Stiglitz, is the fire sale solution. Why not force the banks to sell their assets for whatever they can get? We might feel that this is what the banks are due and that it would wreak a sense of retribution on the banks from a scenario they have themselves created. Our individual feelings about the banks should not determine what is in the long-term public interest and a fire sale simply would not be in this interest.
Forcing the holders of loans to sell assets at prices below those at which they could rationally expect to realise in the near future would not mend a banking system that is seriously broken; the opposite is the case as it would dig an even greater hole. Such an arrangement would not put our financial system back on track and would upset it even further. As has already been mentioned, we must address the health and stability of the banking sector if we are to get the economy moving again.
Letting the market take its course would worsen an already bad position and that is why I am surprised that any group of economists in this country or elsewhere would line up behind this view. Using unsubordinated bonds puts the banks at risk if NAMA were to lose money, which is not our expectation, and approximately 5% of the total consideration will be in the form of subordinated bonds. The levy will also be in place so the interests of the taxpayer are very well protected.
In the context of the risks taken by the taxpayer, it is interesting to address the question of the valuation and what is required for the taxpayer to break even on NAMA. If we take the subordinated debt into account, it is estimated NAMA would have to achieve an uplift of less than 10% over the current market values of the assets over ten years to break even.
I canvassed in an estate recently with the Acting Chairman in Tallaght. It is an estate with which I have a personal affinity and I remember in a previous distressed time when houses in it changed hands for £4,000 or £5,000. The Acting Chairman knows as well as I that even in the current distressed market 20 years later, the houses are significantly more valuable than that.
Under the NAMA proposals, it is reasonable to suggest that a 10% uplift over the current market figures in a ten-year period is achievable. From experience, I cannot believe anybody would argue that this will not happen. Considering what has happened in that estate in Tallaght over 25 years since it was built, including the peaks and troughs, over a ten-year period it was easy to achieve a 10% uplift. If a 10% uplift on property values is achieved or prices kept pace with the general rate of inflation, the taxpayer would be insulated. There is no assumption built into the NAMA proposition — it is important to say as much — that peak property prices will or must be achieved. It would be economically irrational to make such a presumption and it is not in the legislation.
There is also the Labour Party proposition. Why not simply nationalise the banks and bring all of them into public ownership? The full nationalisation of Allied Irish Banks and Bank of Ireland, which is what the proposal amounts to, has been ruled out on the basis of information which has come to us through due diligence and stress test exercises undertaken in March on the State's purchase of preference shares in the banks. Other information on expected future bank losses indicates that full nationalisation is not necessary and would be unhelpful in reconstructing some sense of support or confidence in the Irish banking system in the medium and long term.
It is not helpful to continue debating the idea that all the banks are basket cases that must be nationalised. Once an institution is totally nationalised, the State must sustain it, as we have seen this in the case of Anglo Irish Bank. If there was no directly criminal activity in that case, some of those involved operated with criminal intent and a cavalier disregard for moral behaviour as bankers.
The State must ensure the minimum capital would be maintained in an institution. If that is not done, the institution ceases to be a bank and all the liabilities become an immediate charge on the State and therefore on the taxpayer. The concept that nationalisation would somehow or other make this problem go away is not based on logic. If Allied Irish Banks and the Bank of Ireland were to be fully nationalised, the shareholder would have to be compensated, unless we decided to steal the assets that exist for shareholders. Such shareholders are not all fat cats; many thousands of unfortunate people invested their life savings in those banks.
At current share prices, this would amount to a €5 billion cash payout before a single cent of new capital could be injected. Where would that money come from? The Labour Party has not said where this additional capital could be found. New injections of State capital would have to be borrowed on world markets at interest rates of at least 5%. NAMA bonds will pay much lower interest than that. The cost of the NAMA proposition is significantly lower than the cost of the Labour Party nationalisation proposition. Full nationalisation would inevitably result in Ireland's sovereign credit rating also being downgraded. I have never heard Deputy Burton or any of her colleagues factor this into the debate, and yet it is an element not only affecting State borrowing but which would have a knock-on effect for every taxpayer in the country. If we are to engage in a logical debate on NAMA and nationalisation, we should proceed to do so.
For a party whose members have a long tradition in and who have made a very respected contribution to business, I am surprised that Fine Gael would suggest that we follow the example of Lehman Brothers and simply default on our debts. That model has nothing to commend it, nor has the idea of a magic bank. Fine Gael's propositions in this area are premised on significant levels of default by Irish banks. The party's proposition in respect of a wholesale bank is that the State would inject €2 billion in capital in such an institution and that on the basis of this money — having already defaulted on our debts — would effectively borrow a further €40 billion. With respect, the figures put forward in this regard simply do not add up. I am of the view that a legacy bank, which is another proposition offered by Fine Gael, would have ruinous repercussions for Ireland.
Rather than putting forward propositions that are unworkable, we should focus our efforts — I hope this will be done on Committee Stage — on making NAMA work. NAMA is a proposition that is fundamentally sound. I have never suggested that all wisdom resides on this side of the House. Such a claim would be arrogant nonsense, particularly in view of the fact that it is not the case. There are people on all sides of the House who, from an economic perspective, have good contributions to make. Rather than chasing chimeras or shadows — which is the basic nature of the propositions put forward by the two main Opposition parties — we should pool our resources to ensure that NAMA works. This should not be done from the point of view of vindicating a position adopted by the Government but rather from a recognition that it is the correct action to take.
This is the first opportunity I have had to address the House in the aftermath of the recent referendum. Obviously, I am extremely pleased on a personal level with the result thereof. Fine Gael and Labour showed real and practical patriotism in respect of the referendum campaign. I informed the leaders of those parties and their spokespersons on the matter of that fact in private. NAMA is also an issue on which practical patriotism could also be shown. If we pool our resources, we will make the NAMA proposition work.
