JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 6 May 2009

National Asset Management Agency: Discussion.

Chairman

I welcome Professor Patrick Honohan and Professor Karl Whelan. The purpose of this meeting is to discuss the creation of the national asset management agency. I thank the professors for taking time out of their busy schedules to meet us to discuss this important topic.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I draw attention to the fact that members of the committee have absolute privilege but this privilege does not apply to witnesses appearing before the committee.

Professor Patrick Honohan

In my preliminary remarks, I will highlight some important aspects of the whole NAMA process based on my experience with other banking crises.

NAMA's asset purchase scheme cannot be considered in isolation. It will entail recapitalisation of the banks. Recapitalisation should be done in a thorough "once and for all" manner, the stock approach. I will outline NAMA's operation and the challenges it faces and will briefly consider the issue of ownership.

Asset purchase and recapitalisation are both needed. The goal of an asset purchase scheme such as that proposed for NAMA is threefold. It can remove the distraction for bank management of trying to recover problem loans of the past, allowing them to refocus on new, sound lending that is essential for the future of the economy; it can help improve loan recovery by separating that task from the team that made the loans in the first place; and it can replace assets of uncertain value with safe and marketable assets.

In some countries asset purchase schemes have also been used in a fourth way — as a covert way to recapitalise banks by paying too much for their problem loans. That is a bad idea because it is a non-transparent subsidy from the taxpayer to shareholders and other creditors that are not guaranteed. In the case of NAMA, the Government has stated that is does not intend to over-pay. There is, however, the risk that NAMA could end up over-paying by accident due to over-optimism. I will mention a variant of the NAMA purchase scheme later that could help to reduce this risk substantially.

Since NAMA is not intended to recapitalise the banks, this must be done separately. It should be done soon, during 2009, and thoroughly. The alternative of letting the recapitalisation issue drift is known as the flow approach to bank resolution. It could also be called the "do nothing approach". It leads to zombie banks, an under performing economy and much higher costs to the taxpayer in the end. Instead, the economy and the taxpayer will do much better with a decisive "once and for all" stock approach to recapitalisation, where we face up to the full reality of future losses up front. By insisting on purchasing bad assets at realistically low prices, NAMA has the potential to be an important catalyst in ensuring we do go that decisive route.

The whole process is far superior to the alternative mechanisms recently used in the United Kingdom — the so-called insurance scheme — and that proposed for the United States, the leveraged private asset purchase scheme. I state that without justification, but it is an important point to make. It must be acknowledged, however, that asset management companies worldwide have had a mixed record, whether they were instructed to dispose of the purchased assets quickly or encouraged to restructure the defaulting companies over a period. It did not matter what approach was taken; some asset management companies did well, while others did badly. In addition to the famous Swedish case, successful examples were in Spain and the US, and not so successful examples in Ghana, Mexico, the Philippines and Senegal. Members may take the expression "not so successful" as an understatement.

An effective asset management company needs to have clear objectives: robust governance, operational independence from government, transparency of operations and strict cost control. All of these are easy to state but hard to deliver. In addition, NAMA, as proposed, has a number of distinctive features compared to other asset management companies. The three features I will mention all deserve scrutiny. The first is that it will take on performing loans as well as delinquent ones. I have not heard an adequate justification for this approach and it could cause problems in excess of any benefit. Meanwhile, it is proposed to ignore even delinquent property-unrelated loans. Why?

The second distinctive feature of NAMA is that its proposed scale is unprecedented worldwide. There has never been an asset management agency as big as this relative to the economy. I worry about this. Third, NAMA will buy from going-concern private banks and not those that are in liquidation or nationalised. This is not exactly a first — there are precedents in Malaysia and Thailand — but it makes the valuation issue tricky in terms of the risk of over-paying for the loans. This risk, or at least part of it, can be eliminated by a refinement of the NAMA purchase procedure. The revised procedure would involve a two-part payment. So far we have only heard about payment in bonds, which is fair enough, but what I suggest is that part of the payment be made in bonds and the rest in the form of an equity-type claim on NAMA granted to the shareholders of the bank. By definitely pitching the certain payment — the bond payment — well under the recoverable value of the loans and allowing the shareholders to claw back any recovery above that, we are leaving the taxpayer in a much safer position. It is better than the idea of an ex post levy, which was mentioned by the Government but is not really consistent with the overall NAMA approach.

I will mention briefly the consequences of recapitalisation for ownership. If realistic loan valuations result in the estimated equity capital — the shareholders' funds — being revised to a negative figure, and if they cannot or will not replenish this capital one way or another, the logic of capitalism implies that ownership control passes to the creditors. There would not in that case be much economic basis for allowing any residual claim to the private shareholders. In particular, although a banking licence is a valuable thing, it is a privilege granted by the State and is conditional, among other things, on the shareholders' maintaining a sufficient level of capital. If they cannot or will not do that, they lose that privilege. There is no point in the shareholders coming back and saying that because they could make a great deal of money from the banking licence, we cannot say their holding is worthless.

Perhaps it will not be negative; equity capital may be positive but insufficient relative to regulation. Even here, someone — presumably, under present circumstances, the Government — must inject the necessary additional amount if the bank is to continue. In this way the NAMA process is likely to point in the direction of a high percentage shareholding by the Government, perhaps 100%. When market conditions improve the Government's shareholding can be sold back to the private sector.

One cannot ignore the extensive international evidence that government-owned banking systems serve their economies poorly. They tend to have higher interest rate spreads and less private credit, and what credit there is goes disproportionately to larger firms. Greater state ownership has been associated with more crises, hard as that may be to believe. The problem is that banking can only work as a revolving fund: money lent out is intended to be repaid. However, in the present circumstances, banks under state ownership may be under pressure to provide finance to failing firms with no prospect of repayment. This pressure might come from a well-intentioned desire to protect economic activity in the recession. It would be a catastrophe, however, for the public finances if, on top of the disastrous error made by the banks and their regulator in regard to the property bubble, there was a large new wave of unrecoverable loans.

The danger in present circumstances that the banking system could, in effect, open up back-door access to taxpayers' funds, without Oireachtas scrutiny, is one that I take seriously. Several of my professional colleagues, including Professor Whelan, who recently wrote about this in The Irish Times, have rightly stressed that a nationalised bank should be operated to maximise shareholder value. That is the way to keep it as a revolving fund, only giving out money that can be repaid. I am concerned that this goal will be difficult to achieve. The presence of some private shareholders, even with a small stake — if that is the way it works out — could act as a restraint and help maintain a dialectic between Government and banks that would be in the long-term interest of the economy.

Chairman

I thank Professor Honohan for his presentation, which gives much fuel for discussion. I am sure Professor Whelan will add a new dimension.

Professor Karl Whelan

I thank the committee for inviting me here. I agree with 99% of what Professor Honohan has said, so I hope my presentation is not too boring. I will try to liven it up during the questions.

Knowing I did not have much time, I focused on three core questions. By and large I agree with Professor Honohan in terms of the answers to those questions, although I may disagree slightly on which points to emphasise or on certain quantitative issues. The three questions I focused on are as follows. First, what is the scale of the problem with our banks, second, how do we fix the problem while minimising the cost to the taxpayer, and third, having answered the first two questions, what is the role of NAMA?

To discuss the scale of the problem, I have presented a table with estimates of the current core tier 1 capital of AIB and Bank of Ireland. This represents shareholders' capital. For AIB, the figure is around €7.7 billion; for Bank of Ireland it is about €7.3 billion. I have also provided a set of estimates for property-related loan losses that have been released by various analysts. In almost all cases these losses are estimated to be greater than the core tier 1 equity of these banks. These are estimates from Goodbody Stockbrokers and JP Morgan. The estimates released last week by Davy stockbrokers are slanted towards the optimistic side, but even so, Davy says that AIB, a bank with tier 1 capital of €7.7 billion, is sitting on property-related losses of about €7.5 billion, which would essentially wipe it out.

Another indicator that the banks are sitting on property-related losses that would wipe out their equity capital is the market capitalisation of these banks. Normally, banks trade on the open market for at least the book value of their equity capital or, more likely, they trade at a premium. One could buy AIB on the stock market today for €0.85 billion and Bank of Ireland for €0.77 billion. These figures are from last Friday, but they are approximately correct. That shows financial market participants also believe the banks are sitting on huge losses, are close to or have completely wiped out their capital. One has to emphasise that stocks do not trade for negative value so that these are a lower bound of what the potential losses should be.

I am concerned about the process we are going through in terms of fixing our banking problems. I agree with Professor Honohan that it is important to grasp the nettle and face up to the scale of the problem facing our banks and that international evidence, much of it provided by people like Professor Honohan, shows that dealing swiftly with the problem all at once produces a far better outcome than being in denial about the problem and going through a slow drip feed in terms of facing up to reality. I am concerned that I do not see much evidence from Government statements that it has accepted the scale of the problem in the same way that almost every other analyst I have seen discussing the issue has. For instance, the Department of Finance has pointed to an analysis carried out for it by PricewaterhouseCoopers stating that "under extreme stress scenarios" Bank of Ireland only needed the additional €3.5 billion in capital that the Government has provided to it and that AIB only needs €5 billion, of which at least €3.5 billion will come from the State. Very few people believe these figures to be accurate. One must recall that PwC do not have a very good track record on this issue. Last year, after the blanket liability guarantee was issued PwC did an analysis and told the Government that all the banks covered by the guarantee would be in good shape in terms of capital until at least 2011 and clearly that turned out not to be the case.

I am extremely concerned that we are heading into the NAMA process with an inadequate diagnosis of the scale of the problem. The only comfort I get from this is that I find it hard to believe the Government believes that this is the scale of the losses. If this is the scale of the problem one could ask why we need the NAMA operation which, as Professor Honohan noted, is an almost unprecedentedly large operation. If the problem has been handled by the existing capital investments, it is hard to see why we would need a NAMA.

The problem is that the property related losses are wiping out the capital bases of the Irish banks. This is before one factors in upcoming losses that the banks will face on mortgages, business loans and credit cards. We are going through an unprecedentedly deep recession by the standards of modern industrialised economies. It is unthinkable that the banks will not suffer large losses on all these areas' business loans. These cyclical losses banks incur during recessions are the major reason banks are supposed to have capital cushions to help them get through their business and through recessions. By focusing excessively on the property-related losses, we are forgetting that if we almost wiped out the capital base with the property-related losses, then other issues would certainly finish it. The problem is that the banks have wiped out their capital bases or they are sitting on losses that will wipe out their capital bases.

What is the solution to inadequate capital? The solution is recapitalisation, almost a tautology. It is important to understand that for months the Government has stated that recapitalisation alone is not the solution, that it will adopt other measures as well. We will talk about these other measures. I will speak about NAMA in a moment. Recapitalisation is the solution to a weak capital base. One gets the sense that if one is reluctant to recapitalise then one can wave one's hands and say there are other measures that will do this.

In terms of recapitalisation, it needs to be acknowledged that international investors are far more wary of lending to banks than they were prior to the financial crisis. A healthy banking system is one that does not need the Government liability guarantee to borrow on wholesale markets. All the evidence in international markets suggests that the banks would need to convince international markets that they are in good shape and can be lent substantially higher capital ratios than prevailed prior to 2007. On exactly how high, Professor Honohan can comment.

Not only are the existing capital bases being wiped out but most likely the banks need to be recapitalised over the levels that prevailed prior to the banking crisis. There are various nuances, technicalities, assets and other things but we cannot underestimate the scale of the capital injection required. Who provides these funds? The answer is that the Irish Government stand-by is the only potential source of equity capital for the banks as of now. One of the reasons is that the banks have underlying profitable businesses in terms of their retail bases and so on. Part of the reason is that nobody wants to buy a business that is insolvent. If people have a business that is worth minus €10 billion that is not something that anybody knowingly wants to take over. Maybe if somebody pays off the €10 billion one can begin to talk. That gets the Irish Government and the taxpayer involved.

How do we protect the taxpayers' interests? There is much confusion about why previously mild-mannered, middle-of-the-road conservative economists such as me and a group of the other people who signed the recent article in The Irish Times would endorse nationalisation. That appears strange and as if we can only see the commanding heights of the economy. It is not that; there are issues relating to the management and control of the banks. The primary issue stems from the following. Our purpose is to create a well-capitalised profitable banking sector. Once that is done, those will be valuable assets. As Professor Honohan pointed out, a banking licence is valuable and can be used in the future to make money. If we have well-capitalised profitable banks they will be worth something.

The Irish taxpayer, having provided the funds to recapitalise those banks, is entitled to the return that will come from being able to sell off its stake in the Irish banks. It is important that whatever deal the taxpayer does to get a stake in the Irish banks that this is done at a fair value. My opinion on the deal done earlier this year involving preference shares, which gave the Irish Government an entitlement to buy a quarter of the banks for €7 billion, is that it was not good for the taxpayer. The market value of the banks at that time was €1 billion. A sum of €7 billion to buy a quarter of the banks is not a good deal when one could buy the whole for €1 billion. This is not about maintaining constant Government ownership of the banks and there are many good reasons not to want that.

The key point is that any public ownership stake acquired can be sold off later. The bullet point in the slide states that "this process may require temporary nationalisation." It is clear that the scale of the losses and the scale of the required recapitalisation are such that the ownership share that will result from this process being run in a fair way is one in which the Government has a 100% stake. As I have noted the Government is rightfully wary of this route. Other colleagues and I who signed the recent article in The Irish Times all recommend that the banks be run as highly independent commercial operations that can be ready for privatisation as quickly as possible. This is a long wind-up to speak about NAMA.

In regard to NAMA I do not have anything too different to say in terms of its substance than Professor Honohan. It is well known that asset management companies have been used to take bad assets off the books of insolvent banks around the world. The advantages are exactly as Professor Honohan mentioned. They can clean up the bank balance sheets. The bank management does not sit around worrying about recovery of all the bad assets; instead it focuses on the rest of the business and carries it on. Simply transferring bad assets from a bank to an asset management company is not on its own a solution to the problem. A widespread myth is that the mere presence of some bad loans on the books of the banks is somehow the source of the problem. The banks can write the loans down to zero and they would be gone. It is not the presence of the loans, it is the fact that the loans are not worth the amount that was lent out and the banks will not get the money back To circle back to the question of recapitalisation is not enough; one needs to do more.

My concern from the start of this process involving Mr. Peter Bacon being solicited to write a report on this through to all subsequent statements is that NAMA is being potentially prepared as a vehicle for an opaque recapitalisation in which the Government overpays for bad assets. As Professor Patrick Honohan rightly observed the Government has said that NAMA will not overpay; it will pay fair value. There is a set of circles that are attempting to be squared and there is a number of reasons to be concerned that is not going to be the case. Two additional claims are being made that give me great cause for concern. The first is that relatively small amounts of capital are required. That can be reworded as saying that the losses are not so big. If somebody believes that the losses at Bank of Ireland are not so major, by the same token one could pay a small discount for the loans and maintain an internally consistent point of view. The second aspect that concerns me is that while it has been repeatedly said that NAMA will pay a fair price and if a discount means that the Government must put capital into banks and take it into ownership, Government sources have repeatedly talked about how nationalisation and public ownership of the banks is an extremely bad thing. Rather than simply saying: let us go ahead with the process and pay a fair value and see where we are in terms of ownership, we are being prepared for accepting the idea that Government ownership of the banks is a bad thing. Those things combined give me concern that NAMA may well be used as a vehicle to over-pay for bad assets. Beyond that there is no reason that a national asset management agency could not be used in conjunction with nationalisation. In fact, I recommended that in a couple of articles I have written.

It should be noted that asset management companies are not the only way to deal with banking problems. One could envisage a route in which the banks are nationalised and sorted out without the addition of an asset management company. We could discuss, perhaps, the pros and cons of different approaches if members so wish.

Chairman

I thank Professor Whelan for that suggestion

Deputy Richard Bruton

I thank Professor Whelan for that very succinct and short presentation, in view of the complexity of the issues involved.

As outsiders, there are three questions we should ask. First, will it work? Second, is it the least cost solution available? Third, if it is going down the wrong road, can we adapt at a pretty low cost and or have we a means of ensuring that we are not committed to a route that could have disastrous consequences?. I worry that this has a very high up-front cost in terms of the taxpayer funding the purchase. It has a very low upside for the taxpayer. From what Professor Whelan has said, it is doubtful whether even dealing with the property section of the banks will actually resolve the bad loan issue altogether and that we may not deal with it. Apart from the shareholders, it seems that the professional investors in these banks, the bond holders seem to have come very well out of this relative to the taxpayers or the shareholders. Generally the shareholders have been cleaned out down to 5% of the value of their shareholding. The taxpayer is shouldering a lot of this liability. The people who appear to be walking away relatively unscathed are the professional investors who got into this with their eyes open and helped fund the bonanza.

I read a book recently talking about 20/20 foresight. The one concept I can remember from the book is when one is in really uncertain times and one has choices, does one throw the dice on one big shot or do things that are right in the short-term and give maximum flexibility as one moves along. My worry is that this proposed solution is similar to taking the one big shot. Mr. Bacon states this is the best shot. The question at the back of my mind is that even if it is the best shot — I am not sure it is the best shot — are we well advised in going the route of big bang and all being part of this huge solution or can we adopt measures that are good in the short-term and leave us with flexibility in the longer term? It certainly seems that if we were setting up an agency to buy assets why would we not buy good assets and allow the banks to start recycling their good lending knowing that they can lend to small business and mortgage and there is some body who will buy those assets off them so that the banks do not have a capital requirement and they can do what banks should be doing and that gives us time to assess if this route is the correct one. Buying up good assets and freeing up the flow of credit by having a wholesale Government bank that can take these off their hands has many attractions. One starts to get credit flowing, so that one does what is really needed, yet without a significant cost in the short term. The problem is left to one side. It may not be solved, it is still there in the hands of those who created it, but at least we have time to watch what other countries do. Do other countries go down the route of burning some of these bond holders who otherwise would move away scot-free? I would like to hear the Professors' reaction to that scenario. If this is the big bang solution, has enough analysis been done of the pros and cons to give us confidence to roll the dice? If one answers "no" to the first question, then we must go for the big bang and as Professor Honohan states, it requires to be confronted very quickly. Is there enough analysis being done on this? While the Professor is an eminently good man, it is one person who has come in with a solution. Has the solution been stress tested? Will Professor Honohan outline the features of this thing where they failed and failed dismally? Was it around the requirements for effective clear objectives, robust governance or was it even more conceptual that the thing went wrong?.

Another question is about legal entanglements. If one moves a loan — and these loans are often multiple layered loans with guaranteed inter-loan — and takes it off the books of someone who will issue it and puts it on to someone else, does one trigger default clauses on guarantees? Will one end up in endless legal wrangles about who is who? Will one find oneself while struggling to chase down one loan impairing a good business that got relatively innocently entangled? Are there down-side risks to taking loans from the people who issued them to new people? The professor said there are advantages but that because of the culture they got too close to these people and it is better to take it out, but are there down-side risks in that?

The professor says there should be once off and urgent recapitalisation. The once-off urgent recapitalisation is pricing things at firesale prices to a large degree, because one is only able to make a stab at things. The counter argument is that if one has time it allows a clearer view of the value of these assets and allows some of them to recover in value. Why is the professor so keen to ensure everything be done in this very short timeframe. The first four moves we make are correct in nearly all circumstances. Making these moves would give us a better view of what is over the brow of the hill, at which point we could make our next moves.

Professor Patrick Honohan

Those are easy questions. Deputy Bruton has raised many important points that should be considered as progress is made over the coming months. I would not like to see very elaborate legislation landed before the Houses of the Oireachtas and to have everything more or less sewn up without the points the Deputy makes being woven into that legislation. Although moving quickly, it is possible to have risk sharing protections in what is established such that one will not be crystallising losses for the taxpayer. It is a question of taking decisive steps to ensure banks can move forward without crystallising the losses of the taxpayer. The essence of my proposal is to underpay for the loans bought by NAMA and afford the shareholders of the banks the possibility to recover any degree of underpayment in due course.

Another important point raised by the Deputy is that we should watch what other countries are doing. There is an evolving debate in the United States where the problems are in some ways worse and in other ways not so bad. However, the United States is proposing solutions and refining them or rejecting them. Over the weekend, I read that it is thought that Citibank is now talking to preference shareholders, a class of professional investors, to determine whether they would be willing to convert their claim into ordinary shares. This implies a redistribution of the risk. This is the sort of approach that I see evolving and which could be part of the discussion within the banks as they face up to the big losses they have made. That could affect the possibility of coming out of this with partly privately owned banks, perhaps partly owned by these professional shareholders instead of their having a 100% claim, as they hope to have at present.

Can one do this in a way that allows one to pull back or modify? NAMA should start small. There should not be a big bang purchase of assets by NAMA to the scale proposed. It should start with the most problematic loans and they should be bought at heavily discounted prices. What needs to be achieved all at once is a comprehensive evaluation of the true position of the banks so one will know how much the shareholders' equity must be written down and how much the State must push the shareholders aside, be it to the extent of 90% or perhaps 100%, and take ownership with a view to establishing the banks on a secure basis. That must be done all at once, if possible. The process of buying the assets can be engaged in step by step to reduce the risk of paying too much.

The Deputy referred to legal entanglements and asked whether the proposed approach will raise many complexities such that NAMA will find it more difficult to recover on the loans or face more complicated legal problems. Ireland does not have a special legal resolution regime for banks; banks just engage in an ordinary insolvency procedure. The British encountered the same deficiency in their legal infrastructure as we do at the time of the Northern Rock crisis. The British Government introduced emergency legislation to deal with this bank and, since then, it established a new special resolution regime for banks. I am not a lawyer but, as I understand it, the regime deals with many of the types of legal complexities to which Deputy Bruton is referring. It protects the interests of the relevant parties, yet makes it feasible to move in and sort out an insolvent bank. This is part of the suite of legislation we will need to be preparing. It took 18 months in Britain but we could probably benefit from what the British learned in the consultation process, thus allowing us to introduce ours more quickly.

Deputy Richard Bruton

Is Professor Honohan referring to an insolvent bank or an insolvent deal?

Professor Patrick Honohan

An insolvent bank. It is clarifying who owns what and the ranking of claims. If the assets are moved——

Deputy Richard Bruton

Must there be a declaration by someone that he or she is insolvent for the mechanism to be triggered?

Professor Patrick Honohan

Yes.

Deputy Richard Bruton

Would that be relevant to NAMA?

Professor Patrick Honohan

Yes.

Deputy Richard Bruton

Who would be declaring insolvency?

Professor Patrick Honohan

NAMA would not be doing that. I presume it should be done by the regulator. In Britain, the Bank of England does it. The regulator would make the declaration. There would not be a court procedure but a more administrative procedure, albeit with the protections that the different claims would——

Deputy Richard Bruton

Would one have to declare the whole big entity insolvent before triggering the clearing away of the great complexities?

Professor Patrick Honohan

I am talking about the case of an insolvent bank that we need to deal with.

Deputy Richard Bruton

What is the position on a solvent bank with troubled loans to which complexities attach?

Professor Patrick Honohan

The Deputy will have to talk to bankruptcy lawyers about that. There are problems but they are not necessarily insuperable.

Chairman

Has Professor Whelan anything to add?

Professor Karl Whelan

I am not a lawyer but believe the question of purchasing loans or taking over loan obligations is not usually a big legal issue. We know all about loan securitisation — this now has a very bad name — by which a loan is offered by a particular bank. Perhaps the bank services it in some way but sells the income stream of repayments and principal interest repayments to another party. Generally, there is no essential legal difficulty with a NAMA-like organisation taking over loans from banks.

To flesh out some matters Professor Honohan did not cover, it is true that we are currently operating within a set of resolution regimes under which the bondholders are protected. The reason is that the Government has passed a liability guarantee that states, with very few limitations, that the Government stands over the bonds issued by the banks. A range of questions can be raised as to whether this is a good idea but it is in place nevertheless. Various arguments can be made, one of which is that any reneging on the guarantee could be regarded as a sovereign debt default, which would be extremely serious and not advisable. Another would concern the failure of the liability guarantee to stabilise the situation, thus prompting its removal such that the responsible individuals would share the pain with the taxpayer and shareholders.

Deputy Richard Bruton

Is there more than €150 billion in elements that are not covered by the guarantee?

Professor Karl Whelan

I do not believe the figure is that high.

Professor Patrick Honohan

I believe there are considerable unguaranteed elements. Any comment that I would have made would not relate to guaranteed items. I would consider it inconceivable that the State would have a second thought about the covered obligations within the period of the guarantee.

Professor Karl Whelan

As I said, there is a range of possible opinions but, by and large, one must consider that most of the bondholders benefit from a guarantee. The only types of bonds that were not guaranteed pertained to undated subordinated debt, which is a very specific type of instrument. It is essentially an equity instrument.

Deputy Richard Bruton

I have a reply from the Department of Finance referring to equity amounting to €22 billion, other unguaranteed liabilities amounting to €182.5 billion and guaranteed liabilities amounting to €342 billion. I do not know what the unguaranteed liabilities are but they amount to €182.5 billion.

Professor Karl Whelan

I have looked closely at the books of AIB and Bank of Ireland and they are quite small in terms of the instruments I understand are not guaranteed.

The other question I wanted to discuss was the idea of not going with a large recapitalisation and going with the flow approach, where the banks make profits over a number of years, adding them to the capital base, leading to a gradual resolution.

We can look at weakly capitalised banks as a problem from two angles. Legally, the banks are supposed to have certain capital ratios. The other angle is that people are worried about the relationship between poorly capitalised banks and the credit crunch. The capitalisation of a bank is measured in terms of its capital ratios, not just the total amount of capital but the amount relative to its assets. A bank that is making profits but is weakly capitalised or fighting against the write down of losses has a strong incentive to get its assets down, particularly risk-rated assets, so it has fewer assets that are less risky. It can be hard to get loan-type assets down because if someone has a 30-year mortgage, it is hard to call him up and tell him the bank wants the money bank. It can, however, try not to issue any new 30-year mortgages.

Leaving banks undercapitalised or worried about their capital situation and not wanting to take an ownership stake from the State risks leaving us with a zombie bank where the incentive is not to lend. That is an argument in support of the big bang approach.

Deputy Richard Bruton

We thought of that by having a wholesale bank that was buying up the new mortgages that were being issued.

Professor Karl Whelan

That wholesale bank would have to be properly capitalised. One way or another the Government must put capital funds in place.

Deputy Richard Bruton

The Government might only put in money for the issuing of new mortgages and small business loans.

Professor Karl Whelan

There is no reason the Government could not start a new bank today if it wanted to. AIB and Bank of Ireland are in place and have branch networks and we have guaranteed a large amount of their liabilities, so we could say we should do it through them.

Deputy Richard Bruton

They could be the agents.

Professor Karl Whelan

Yes.

Deputy Michael McGrath

I welcome Professor Honohan and Professor Whelan and thank them for their insightful commentary.

The lack of credit in the banking system must be addressed immediately. A gradual resolution of the fundamental problems in the system was mentioned but we do not have that luxury because if it is not functioning again quickly, the prospects of any economic recovery are diminished. We have no option but to take the big bang approach mentioned by Deputy Bruton, we must go in and do what is needed to sort out the banking system.

Professor Whelan focused on recapitalisation, identifying it as the solution. Given that we need to face up to the level of bad debt sitting on the banks' books currently, if the banks wrote off those debts, and given that higher capital ratios are now required by the markets than are set out in the regulatory system, what level of State recapitalisation would be required to satisfy the markets? What figures are we talking about, given that the purpose is to create well capitalised, profitable banks?

It was said that NAMA does not boost the equity capital of the banks, which is true, but if it meets its purpose of dealing with the bad loans on the banks' books, the banks will become more profitable and attractive to international markets. The banks prospects of attracting commercial investment will be greatly enhanced if NAMA works. If the State went in with recapitalisation alone and did not force the banks to face up to the bad property loans, is there not a risk that the banks would never face up to those bad debts? NAMA is forcing their hand by taking all of the property-related loans off their books in the short term.

How should NAMA price the assets on the banks' books? It was asked why we would buy performing loans, but how would we value a performing loan? Would it be purchased at its full nominal value or would a value be attached that more closely relates to the value of the asset that is the security for the loan?

Do the witnesses agree that the current position is unsustainable and that the bad property loans in the banking system are clogging up the normal functioning of the system? Has the Government no option except to face up to that? We are discussing the mechanism for addressing the issue but the fundamental point is that those loans are clogging up the system and must be dealt with either through the asset purchase company or recapitalisation. However, I am not convinced that full recapitalisation by the State would result in those bad loans being written off in the way they should be.

Professor Patrick Honohan

How deep is the hole? I will distinguish between two elements. If we carry out the evaluation and get it right, for each of the banks there will be a number, representing the position of the shareholders, that is either positive or negative. If it is negative, the Government must fill that hole and bring it up to zero. It must then put more capital in to have a working cushion so there is no reliance entirely on depositors' funds.

It is hard to judge what the negative is. When we have got to zero, it is easy to say how much is needed on the positive side. For Bank of Ireland and AIB, somewhere between €10 billion and €15 billion will be needed, once they have arrived at zero. It could be at the lower end because many of their assets will now be safe and have a lower requirement. Perhaps they are not at zero but a little bit above, and not all of the analysts' estimates indicate they will go below zero. The aggregate for the system is roughly zero, with some banks positive and some negative.

I do not want to set myself up as an expert on those balance sheets, there are professional analysts who do these things and even they do not have sight of the loans and securities. People are throwing numbers around because they can do nothing else. I am not saying they are worthless but we should recognise that a close scrutiny by people who have looked at the books might reveal a more optimistic or pessimistic outlook. I have a certain amount of experience from different banking systems and I get the impression that some banks are in a negative position so quite a lot of money must be put in. Some of that could be a conversion of the existing preference shareholding that has been put into Bank of Ireland and will be put into AIB in the next few days, totalling €7 billion.

My answer is, in a sense, a point for debating. Professor Whelan suggested the Government got 25% of the banks for putting in €7 billion. However, that was not the contract. The contract was that it would get an 8% dividend — which is a very good rate of return — and a 25% vote, and if the banks do not pay it would get something else, and so on. It is a much more complicated contract. The Government may end up only getting 25% of the shareholding if the banks cannot pay the interest and cannot repay, so there is some merit in the proposition. However, it was not bare-faced robbery, as would have been implied by the suggestion that it was getting only 25% for such an outrageous price.

Is the business of bad debts clogging up the banking system? It is clogging it up in a number of ways. It is hampering the banks' ability to raise new deposits and money from professional investors, on which they will have to rely in the future. People will not be very keen to roll over their loans — particularly foreign investors — until they see this has been cleared up. It is a tight liquidity situation. In addition, management time is taken up with bad loans.

However, what about after this is fixed, when the banks have proper capital and the bad loans have been taken either into NAMA or into some tidy arrangement? We must be realistic about the speed with which the banks will recover their sang froid and their confidence in lending. Banks become very skittish after an event such as this, and it will be years before they are giving out loans without even hearing the details of the proposals. This is an important point for Members of the Oireachtas because some of their constituents are probably thinking the Government is going to give a block of money which can now be lent out. It will not be as simple as that, and there will be disappointment. People will ask what they got for putting money into the banks. It will be a slow process.

Professor Karl Whelan

I am a little more pessimistic than Professor Honohan about the scale of capital that will be required to get these banks back in good shape. In addition, I suspect it is not just some of the banks that are below zero in terms of the underlying value of their assets. It is difficult to know. It is not as though academic professors from outside are going in and looking at these things in a very detailed way.

There are other reasons for thinking the amount of capital needed might be large. If we consider banks that are surviving, HSBC, for example, just launched a rights issue in order to get to a 10% tier 1 capital ratio. Irish banks are currently at around 6%, if that is a comparable model. Professor Honohan's figure of €15 billion comes from something like the table I presented which shows that the current core equity of the two major banks is €15 billion. That is getting them back where they are, but they need to go further if banks are to be willing to lend to them.

There is also the issue of the accountancy value of bank loan losses. One of the problems with accountancy regulations is that they are a bit slow to recognise when there is a real problem. With regard to Deputy McGrath's concerns that the banks would never confess to the extent of the property loans even if they are recapitalised, at some point the accountants have to look at the loans and say that the ones that are not being paid back must be written down. However, there is a debate about how quickly that will happen. It is true there will be a steady trickle of losses. Part of the reason the banks might need to be recapitalised to 10% is that even if 6% or 8% was all right, there would be a need for insulation against the writing down of losses on other types of vehicles over a number of years. I do not have too much else to add in this regard as I agree with most of what Professor Honohan has said.

On the famous issue of €7 billion for a quarter of the banks, it is true that the preference share deal comes with an 8% dividend. That is a grand total of €560 million that the banks are ostensibly handing back to us. That is €560 million less for the banks which they could have retained to boost their capital base. If we already believe that €3.5 billion is not enough and the banks are going to need more capital, this may well end up being a deal whereby €560 million comes into the Exchequer and a corresponding €560 million goes back out just to keep the banks exactly where they are. In terms of the total scale, if one thinks about the €7 billion and considers the profits the banks made in the good years, one can see €7 billion is an awful lot of money for them to have to pay back. The years ahead will not be good ones. From the moment the deal is done it is likely that the €7 billion could not be paid back in five years' time and would have to be converted. The rate of the conversion matters also. However, it is true that the deal came with an 8% dividend.

Deputy Michael McGrath

If the Government had bought the banks at the market capitalisation value of less than €1 billion, that would not have fulfilled the need to recapitalise the banks. We are putting €7 billion in; if we had bought them for less than €1 billion it would not have met that need.

Professor Karl Whelan

No.

Deputy Michael McGrath

Second, if we had bought ordinary shares and the project had failed, that investment would have been a write-off. They would effectively be gone.

Professor Karl Whelan

There are various issues — Professor Honohan would know more about this than me — about the extent to which banks trade on the market for values relative to book value. What is the book value of the equity capital? It is the total we would be left with if we sold off all the assets and used that money to pay off the liabilities. One does not do it in the manner of a fire sale; one does it in an orderly manner. There is reason to think the operation should be worth that. The market value of the bank relates to other things. People are doing deals and making loans in the branch network, and the bank could make profits in the future; it is entitled to a flow of dividends. Thus, there is good reason to think a recapitalised bank would be worth something. The Irish branch networks have traditionally been reasonably profitable, although we do not have the world's most competitive retail branch banking system. One could have some confidence that investment in nationalised, recapitalised banks would pay off in the future. I have reasonable confidence that is the case.

Deputy Michael McGrath

To be fair, Professor Honohan put a figure on it. In the absence of the NAMA proposal, what level of recapitalisation of the two main banks would be required, based on the level of write-offs they are facing?

Professor Patrick Honohan

Regardless of NAMA, the money will be required. NAMA will not fix it.

Professor Karl Whelan

I suspect it is more than €15 billion. We are starting off below zero somewhere.

There is one point on which Professor Honohan and I are agreed and which perhaps has not been emphasised enough. I suggested the banks should probably be nationalised, cleaned up and privatised, and Professor Honohan has suggested a mechanism in which NAMA underpays for the assets and the bank shareholders are given an entitlement to any upside from NAMA. An advantage of both of these approaches is that putting a price on the value of all these loans today does not matter particularly. It would not be crucial to get it right. This is important because it is very difficult at the moment to know the full extent of the hole, although we will find out over years.

Professor Patrick Honohan

That leads to Deputy Bruton's point.

Deputy Joan Burton

I join with other members in welcoming Professor Honohan and Professor Whelan to the committee. The academic economists involved in the website www.irisheconomy.com have done a valuable service, because one of the problems we have had is a lack of transparency.

The IMF suggested a figure of €24 billion as the cost of nationalisation and, because of the level of that cost, suggested that a sort of "quickie" nationalisation — with the banks being returned to private ownership once they were cleansed — was probably the cheapest mechanism for Ireland.

On budget day, the Minister told the Dáil that the portfolio for property and development loans was €80 million to €90 billion. Recently we have seen a string of different reports from estate agents, advertisements in the newspapers and so on, indicating that the fall in property values, particularly for development land, is extremely high at 80% or 90%. The €80 billion to €90 billion in development land possibly includes the rolled-up interest for at least the past year-and-a-half to two years and presumably that is a dead duck in terms of recovery. Even a conservative level of write-off of, say, 50% on average, suggests that the worst case scenario could be €30 billion or €40 billion if we get this wrong. Do the witnesses have a sense of the likely long-term cost of getting the banks operating in terms of providing credit to businesses, which is the principal objective of the exercise? Our difficulties appear to be particularly compounded by the nature of the Government guarantee, the fact that our guarantee was so extreme as to include a very wide level of depositors — on which I think everybody agrees — but also its extension into tier 2 capital. This is still the overhang that makes the solution in Ireland particularly taxing and difficult. My other question is linked.

Having listened to the evidence of people who were involved with Sweden and Finland, transparency appears to have been the key. Do the witnesses find it frustrating that we have no real analysis of the €80 billion to €90 billion? Also we have no analysis from the Department of Finance or the Minister or commentary on what the IMF said, given that the IMF, together with the ECB, would be regarded as serious commentators to whom we should pay serious attention.

On pricing, all the evidence around the world suggests avoidance of nationalisation at all costs because the exit strategy is difficult. That appears to be what the witnesses are saying. They are worried that with nationalisation, people might feel they can go into a bank and argue a local or regional case about funding. On the pricing front, if one does not take the nationalisation route, how can we get over what the Minister acknowledged in London is a fatal circle of crony capitalism and incestuous relationships between the bankers, developers and a particular political party? In the Irish case, because of the Minister's acknowledged confession of the cancer of crony capitalism infesting the system, does nationalisation offer a clean break and, as the IMF appears to suggest, put some floor under the maximum cost to the taxpayer whereas in the case put forward by the witnesses, should it work out perhaps the costs would be lower? If the big bang does not work and we bet everything on red, we potentially end up with a much higher cost.

There is nothing in Mr. Bacon's report that indicates how the valuation process in NAMA would operate. Is this not a fundamental flaw? I met people from Sweden who said that in Sweden there was an independent valuation board, staffed largely by people like the witnesses who were professional economists, independent of the Government of the day, but on the transparency front, the political parties on both sides of the aisle — Government and Opposition and the general public — were heavily informed on the pros and cons, risk and values, associated with the different mechanisms. Professor Honohan worries about nationalisation and I understand his concerns but I worry about the crony capitalism and the valuation sticking the Irish taxpayer for €40 billion. We have property and development loans of €80 billion to €90 billion — which are the only figures the Minister has given. At the last meeting of the joint committee I asked the very distinguished person from the Department of Finance what was "stress testing" and why Irish Nationwide is of systemic importance to the Irish banking system. I looked up the maths on stress testing and I spoke to mathematicians as opposed to economists about it. They told me not to worry, that stress testing is mathematical mumbo-jumbo at the moment in the context of the current markets where there is little or no market and to just ignore it.

Then I find a long reply from the Department on Finance on systemic importance stating that Irish Nationwide is systemically important. Why is it systemically important? Presumably Irish Nationwide and Anglo Irish Bank will have a large component of their bad business going into the NAMA bin——

Chairman

I understand that Anglo Irish Bank will not.

Deputy Joan Burton

Fine. I do not know if the witnesses are privy to this. This is why the transparency issue is so important. The latest suggestion I have heard is that NAMA will not have the bad loans transferred from the different institutions. Instead, they will be held back at the ranch in the different banks and managed with some oversight from a NAMA agency and, perhaps, contractors who will supervise. Can the witnesses sort out that issue because I am confused by that suggestion? Given that we cannot deal with these items, they are the net points for and against nationalisation.

Professor Patrick Honohan

I thank Deputy Burton for giving me the opportunity to respond. I am frustrated that we do not know anything about this. We have brief statements and indications from Government sources and a very brief report from Mr. Peter Bacon which, as the Deputy said, does not deal with how NAMA will work. Maybe I am being naive in hoping that at some stage all of this issue will become clear and will be brought out into the open. Transparency is key but it has not happened so far. I share the Deputy's concerns that this will not be done very well.

For what it is worth — my opinion is probably not worth very much — I am not against nationalisation at all costs. We come to the point in our discussion and in our calculations that we are in the territory of 90% State ownership and I do not disagree with that. The question now is whether there is a reason to hesitate to go to 100% ownership or a reason to look for a way of avoiding the 100%. There might be some reason.

I do not regard it as a very important issue one way or the other. Having 90% control will convey many of the risks about which I have talked. I am not all that optimistic that the unhealthy relationships between certain banks and developers, etc., will be decisively broken by any decision on nationalisation, NAMA or anything else. Perhaps what is most promising is the possibility of pulling loans out of the banks and giving them to NAMA. As the Deputy pointed out, that will not work if the current management teams in the banks remain in place. That seems to nullify quite a lot.

Deputy Joan Burton

That is what has been suggested in the latest media leaks.

Professor Patrick Honohan

Absolutely.

Deputy Joan Burton

Does Professor Honohan believe the suggestion that the loans will stay with the banks, while NAMA will have a supervisory role, has validity? That is what we have heard in the most recent leaks or suggestions.

Professor Patrick Honohan

Such a system would not make an awful lot of sense to me. I do not think the loans could be managed in a substantive way by the issuing banks. What would be the point of that? The Deputy is talking about leaks and suggestions. If the system is organised in such a manner — we do not know if that will be the case — it would not make sense to me. The Deputy is right to be concerned about this possibility. That is why I am trying to come up with schemes that would minimise the certain exposure of taxpayers. Perhaps we do not need to take the NAMA route at all. As the establishment of NAMA is on the table, however, we should discuss it. That is what I have been asked to do. Perhaps we do not need to take this route. We need a good mechanism for dealing with the bad loans. Regardless of whether it is put in place by the banks or NAMA, a good mechanism is needed and we need to see how it will work. It will have to be done in a transparent way. There is also a need for robust valuation procedures. I am not an expert on valuation, but one cannot rely on the market when there is none — when there is no buyer and no seller. When the factors that determine market prices are being analysed, theory is usually matched with practice. When there is no practice, however, one is on very shaky ground if one bases valuations on theory alone.

I fully agree that stress testing which is being used by the US Government is mumbo jumbo. It is a configuration of eventualities. It involves trying to price loans in some theoretical situation, which is even worse than trying to value them in the current situation. Stress testing which is being used in the United States is being suggested here. We will hear tomorrow about the results of the big stress test. This exercise is analogous to what I have described as a comprehensive or thorough evaluation of the banks. When one examines what is being said about the American approach, it seems the figures that will emerge from it will be optimistic. America might not be a good model with which to work. As I said in my presentation, we are in risky territory and trying to balance risks. I suggest the three points on which NAMA should be thoroughly examined are its scale, the scope of its assets and its evaluation. I do not know what else I can say in response to the Deputy's point.

Professor Karl Whelan

Deputy Burton raised many issues and I would like to briefly cover a few of them. I will start with the question of cost.

We have had a discussion about the fact that the bad loans of the banks mean their solvency is somewhere below zero. We do not how far below zero it is. Part of the reason for this is that economists, as we all know, cannot always predict the future. The future solvency of the banks will depend on various items. It will depend on how quickly the domestic and global economies come out of recession. We need to face up to the scale of the problem. We need to assess how much capital the banks need to function in the real business world. It is likely that the final cost will not be clear for a number of years. Studies of the cost of a banking crisis are usually written five, six, seven or eight years after the event, as the late returns trickle in. We really do not know. However, we can be confident that the losses are sufficiently large to ensure the State will have to provide equity funds, in one form or another, to recapitalise the banks. I am less sympathetic to approaches to the problem that sees one bend over backwards to keep a small share for private shareholders in the banks. The same shareholders cheered on the boards of our leading banks when things were going wrong. They monitored the boards poorly. Deputy Burton also mentioned the IMF figures. The figure of €24 billion refers to the final tally of the cost to the State. In a sense, it is exactly the answer. My interpretation is that it represents the amount below zero that the IMF thinks we are——

Deputy Richard Bruton

It is in addition to——

Deputy Joan Burton

We have already committed €7 billion, plus another €1.5 billion.

Professor Karl Whelan

My interpretation is that €24 billion is required, in addition to whatever is needed — perhaps €15 billion — to recapitalise the banks. The calculations are not particularly easy to interpret, but I have given my personal interpretation. One can quibble with them on the basis of various methodological issues, if one wishes. The calculations were made by a highly skilled expert team which provides this analysis for——

Professor Patrick Honohan

Perhaps I will interrupt at this point, as I did not address the question about numbers. I apologise to Deputy Michael McGrath. Not only does €15 billion need to be provided above zero, but further moneys need to be provided below it also. I do not need to point out that it is very hard to be sure about these matters. We all know this. The €24 billion figure produced by the IMF is based on an approach that I would not use. However, I do not find the resultant figure from that approach to be astonishingly high. The range of possible figures is approximately €50 billion wide. The IMF's figure of €24 billion is above the midway point, although not by very much. It is not impossible that we could get away with a zero fiscal cost, but the final figure could also be much higher than this. The IMF's figure of €24 billion did not come as a big surprise to me.

Professor Karl Whelan

Deputy Burton suggested the Government had not commented on this issue. I think it did comment on it, in fact, on a number of occasions. As I recall, it unwisely rubbished these calculations on a few grounds. I wish to comment on one of the grounds on which the calculations were considered to be incorrect. The IMF used a methodology to look at credit default swaps. The financial markets estimated how much money might have to be paid back in terms of the liability guarantee. The IMF drew up an estimate of how much money would have to be paid back if the guarantee were triggered. A number of Ministers said the IMF was wrong to do this because there was no question of the guarantee being triggered. That is not how I imagined the guarantee would work. If the day were to come when the banks could not pay back their bond holders or meet their liabilities, I am not sure they would announce that they were out of business and suggest that those affected should consult the Department of Finance. I do not think that is how it would work. We would have to invest capital or equity in the banks to make sure they were sufficiently capitalised to make repayments. The implication underpinning the liability guarantee is that if liabilities are guaranteed, the State will need to——

Deputy Joan Burton

Perhaps the officials could explain this better to me in response to a question. I read in a newspaper that Irish Nationwide Building Society had bonds of up to €2 billion due for repayment sometime between May and July this year. The Minister confirmed this to me in the Dáil. The media have also suggested Anglo Irish Bank has bonds that are due to be rolled over rather than repaid, as such. Is Professor Whelan arguing that, regardless of the debate on the system used in this process, the terms of the guarantee mean that the Government will have to reguarantee these bonds when they fall due?

Professor Karl Whelan

Yes.

Professor Patrick Honohan

I do not think they have to reguarantee the bonds. They will have to repay the existing bonds, but they will not have to give guarantees in respect of new bonds that were issued to roll over the existing bonds.

Deputy Joan Burton

In his budget speech, the Minister said he might continue the guarantee for a five-year period.

Professor Patrick Honohan

He might envisage doing that, but he does not have to do it. That is a discrete decision.

Deputy Joan Burton

Would that be an extension of the guarantee?

Professor Patrick Honohan

Yes. It is not necessarily required. Nothing that falls due after September of next year is guaranteed. The Minister may choose to make provision for certain further guarantees, presumably in respect of banks that he intends to continue beyond that period. He said in the Dáil that he might do that.

Professor Karl Whelan

I would like to make a point that is separate to the IMF business. There has been a discussion about how NAMA will operate. I will make a couple of observations. I was asked whether an agency of this nature is necessary. It is not 100% necessary. One could decide to nationalise the banks, or to bring them into 90% State ownership. One could go down the route of writing these bad loans down to realistic valuations, before recapitalising the banks and letting the banks that issued the loans chase up as much of them as they can. They could be allowed to get as much as possible back. That would be one way of doing it. Another way would be to allow a separate agency to get as much as possible of the loans back. To be fair to Mr. Bacon, from what we have seen of his short report, it seems to represent the start of a discussion on this issue. His assessment is that responsibility for these loans should be taken away from the bankers who sanctioned them.

The phrase "crony capitalism" is used in Mr. Bacon's report, which suggests that a specialised work-out unit is the way to go. One of the problems with that argument is that the report, which was commissioned by the National Treasury Management Agency, recommends that the agency itself should be responsible for the work-out operation. The agency does a perfectly good job of managing Government bond issues. One could debate how well it has done at managing the National Pension Reserve Fund. I do not think the agency claims to have huge amounts of property expertise or experience of dealing with assets of this nature. We are hearing leaks to the effect that things will be dealt with back at the banks. I assume the suggestion is that some committee of people who work for the banks at present will be seconded to the National Treasury Management Agency in some way. That does not strike me as a particularly satisfactory outcome. It is not clear what kind of career path would be open to such individuals. Will they see themselves as working for the bank or for NAMA? If they do a good job with NAMA, what will happen when NAMA is wound up? If NAMA is to operate in that way, we would be better off not to have it at all.

A wide range of bureaucratic issues is associated with NAMA. As a single vehicle, it will be given control of a large number of property loans. I am concerned that people will want to attach another set of social objectives to NAMA. What if it is asked to contribute to positive environmental or social outcomes? It may be easier for a single NAMA, run by a particular individual, to do that than it would be for banks that are run as independent semi-State operations with a mandate to clean themselves up and get ready for privatisation. If one weighs up the merits of the establishment of a NAMA-type organisation, compared with the nationalisation of the banks, which would involve writing the loans down and keeping them in the banks, one will see the scales are quite even. When the State takes whatever fraction of control we are talking about, one would hope there will be a detailed examination of the management structure of these banks. One would also hope that the culture of crony capitalism that has existed before now will be addressed in some way. Like Professor Honohan, I do not think there is a simple solution. The question of whether it is absolutely necessary to establish an asset management agency of this type is an open one. The stabilisation measures that were taken during other banking crises, some of which involved a NAMA-type agency and some of which did not, had varying degrees of success. I accept that the answer I have given, which involved an approach of "on the one hand, on the other hand", is a classic economist's answer.

Chairman

A former Taoiseach once said that he would like to meet a one-handed economist. I thought we had such an economist this evening.

Deputy Kieran O’Donnell

I thank Professor Whelan and Professor Honohan for attending this meeting of the joint committee. I would like to highlight a number of elements of the NAMA proposal. It has been suggested that NAMA should be considered under three headings. The first heading — the scale of the problem in our banks — should be quantified in terms of value. If we are to address the second heading — the need to minimise the cost of fixing the problem — we will need to know what the likely cost to the taxpayer is. The third heading — the role of NAMA — is obviously a matter for discussion.

The whole purpose of this measure is to ensure that funds flow to small businesses. I have worries about NAMA, as it is currently proposed. I understand that approximately 1 million units could be built on this country's undeveloped land that is zoned for residential use. We have enough land to supply houses for 20 years, if an average of 50,000 units are developed each year. We were told by the Financial Regulator that property and investment loans worth €90 billion are outstanding. It seems that loans pertaining to development land account for approximately €60 billion of that. If the average cost of building a housing unit is €60,000, it is clear that 1 million units can be built for €60 billion. Most of this country's undeveloped land that is zoned for residential use is currently tied up in loans. We are shifting debt that could take years to realise from the banks to the taxpayer. It is probable that some of it will never be realised.

I will conclude by asking the questions in respect of which I really want answers. What is the total cost to the taxpayer of NAMA and the recapitalisation of the two banks? Can the officials put a figure on that? How many years will pass before NAMA, if it is established, will have carried out its task? Do our witnesses believe further State funds should be given to Anglo Irish Bank? Do they think the bank should be wound down at this stage? It could be reconstituted as an agency, in effect, until its loans have been wound down. Is there not a strong argument for using taxpayers' valuable resources to provide funds through the Irish banking mechanism to small businesses? We seem to be trying to fix a property problem that may be impossible to fix in the short term. I am looking for absolute values. I have asked straightforward questions. My view of the banking crisis is very simple. We have to ensure that funds flow to small businesses. If we do not do that, more people will lose their jobs. We have to ensure that funds flow to mortgage holders. This is about the real economy. I am worried that we are getting into a theoretical argument about the banks themselves. The banks are a vehicle for providing funds to business, but they are not doing that at the moment. I would like to hear the views of the officials on the matters I have raised.

Professor Patrick Honohan

The Deputy has asked some simple questions. He thinks we have skirted around the issues. He wants a direct number.

Deputy Kieran O’Donnell

Absolutely.

Professor Patrick Honohan

As professionals with reputations to maintain, we do not want to give a number that we cannot really defend.

Deputy Kieran O’Donnell

This is the nub of the argument. The problem is that everybody is talking about looking at NAMA as a vehicle. At the moment, our national debt is increasing at an alarming rate. The ordinary taxpayers will end up paying for it. They will end up paying for NAMA. Ultimately, this is about getting funds flowing to small businesses. We have choices to make, as Professor Whelan stated. NAMA may not be the correct vehicle, which is why I am posing these questions.

Professor Patrick Honohan

Let me take them since the Deputy is talking in terms of public debt. It is clear that the sums of money involved could add 20% or 30% of GDP to the national debt. We can just about afford this.

Deputy Kieran O’Donnell

Is Professor Honohan including the recapitalisation of the banks?

Professor Patrick Honohan

A figure of 20% to 30% of GDP is €50 billion.

Deputy Kieran O’Donnell

That is the cost of buying the assets NAMA is to purchase from the banks. However, it does not take into account recapitalisation of the banks.

Professor Patrick Honohan

I do not believe NAMA should go as far as €50 billion; it should be of a much smaller scale. However, I do not know since there is no transparency. My guess is that the territory NAMA should be in is around the €20 billion mark.

Deputy Kieran O’Donnell

Is NAMA not a pig in a poke for the taxpayer?

Professor Patrick Honohan

It should not be, but it could very well be. It must not overpay for the assets in question. The real pig in a poke or the real cost will be the cost of the injection of funds into the banks. That is where the big exposure for the Exchequer will occur.

Deputy Kieran O’Donnell

Ultimately, in using those terms is Professor Honohan not talking about in effect the nationalisation of the banks?

Professor Patrick Honohan

Yes, we are talking in effect about nationalisation. The question then is: can we get some shareholders into the picture?

Deputy Kieran O’Donnell

Is there another model, a third way? Professor Whelan spoke about other models.

Chairman

Perhaps we should discuss that aspect on another day.

Deputy Kieran O’Donnell

These are the key questions.

Professor Patrick Honohan

There is an issue which Deputy Bruton raised, that of another approach to banking, new entities and so on. However, that is a separate discussion; it would not fix the problem with which we are faced. We are faced by banks in big difficulty and we cannot just leave them out to swing. That would not make sense in the economy. If there is to be a new banking initiative, it will have to run parallel to dealing with the major banks. I do not believe all guaranteed banks are necessarily essential, nor should this be seen as an absolute policy goal.

Deputy Kieran O’Donnell

Does Professor Honohan regard Anglo Irish Bank as being in that category?

Professor Patrick Honohan

Personally, I would not see it as an essential part of the economy for the future. It might find a way to restructure itself, but I would not see it as an essential part. As for how long it would take, it has already said ten to 15 years and that is definite. As the Deputy indicated, many of the property assets are not of much use. Some will be of some use some way down the road, but that must be taken out of the picture. Such a consideration cannot preoccupy bankers. They must have units within the banks to deal with such speculative assets, but these are not matters for serious managers. That is in the past; we need to know about the future.

Deputy Kieran O’Donnell

What about the taxpayer in all of this?

Professor Patrick Honohan

The taxpayer will have to bring the banks up to zero and then capital to a workable level. That is where the big money is going to be needed.

Deputy Kieran O’Donnell

The taxpayer believes that to date he or she has not got value for money from the banks. We have to find a mechanism to ensure funds flow to small businesses. I am not convinced that this will happen in line with what is being proposed under the NAMA initiative. I should like to hear the views of the two professors.

Chairman

The details of NAMA have not been published, but the professors might wish to comment.

Deputy Kieran O’Donnell

With due respect to the Chairman, it has been well headlined.

Chairman

Perhaps Professor Whelan might comment.

Professor Karl Whelan

It is clear that there is a problem with the extension of credit in the banks or the economy. To be fair, I do not believe one can necessarily put all that down to undercapitalisation. There is a well known phenomenon in business cycles that during recessions, when there are bad risks, this is precisely the time banks do not want to touch them.

Deputy Kieran O’Donnell

Take the general point of the effects on small businesses.

Professor Karl Whelan

In terms of what the Government can do, namely, the issue about which we talked regarding undercapitalised banks and how their incentives are not designed to extend new loans, but rather to reduce their risky assets, recapitalisation of the banks is intended to solve that problem. However, it has not yet been done. My short answer to whether NAMA can deal with that issue is that it will only deal with it if we overpay and we should not do so. The arguments for NAMA are related more to the elimination of uncertainty. We put a price on something, say what it is worth and then get them out. When we look at the capital position of the banks, it is going to be bad. Capital will have to be provided, almost certainly by the taxpayer. That will be the role of NAMA, if it all comes off well.

Deputy Kieran O’Donnell

It will be very expensive for the taxpayer.

Professor Karl Whelan

That is correct. We can discuss options in terms of the best way to proceed, even though it will start with something that is bad. There is no doubt that this is a bad situation, but one can still pick the best of a bad lot. I am concerned that we will not do that.

Deputy Arthur Morgan

I, too, thank Professors Honohan and Whelan for their presentations. We are still dwelling, to some degree, on the first question, that of the scale of the problem. The Joint Committee on Enterprise, Trade and Employment was told by the Financial Regulator in late November or early December that in his estimation toxic loan liabilities were in the order of €39 billion. We know that is a lifetime away and heard the Minister for Finance say on budget day that the figure was between €80 billion and €90 billion. Let us accept for a moment that the figure is €80 billion. If NAMA were to pay, say, €50 billion for these toxic assets, is it not the case that recapitalisation would probably cost around €80 billion to get everything going again?

On the issue of defaulting to bond holders which we know to be a serious matter, what would the consequences be in that event? Would IMF officials come here on the next aeroplane to take over? Where stands the business model? In the case of a business owner, he or she would just continue to deal in an attempt to get some of his or her money back from customers. In business one shakes one shoulders and just gets on with it. I am wondering about the consequences of the default mechanism from the State's viewpoint. One assumes the Government got the figure of €80 billion to €90 billion from the PwC report, or at least those parts of it that were read.

What do the professors think about the notion that, rather than establishing NAMA which is another bad bank, we legislate to formally recognise in law one of the banks to deal with the toxic assets? Rather than nationalise all the banks, what we would really need in that scenario is the establishment of a good bank to perhaps nationalise the good assets. Would that be technically viable in the professors' view? I am not suggesting for a second that either of our guests would be pleased with what has happened, but I am sure they must acknowledge that it has made their profession very interesting.

Professor Patrick Honohan

It reminds me of a book I completed a few years ago with a colleague. I made a presentation of it to an important person and I discovered that my colleague had made a presentation also. I had inscribed it "Hoping that this book on banking crises will never become necessary". However, my colleague had inscribed it "Hoping that this will become compulsive reading". It turns out to have been the latter that has happened.

We have been bandying around many numbers, even though we have not wanted to pin ourselves down. People have been talking a little bit about things that need to be borrowed and people have been talking about absolute losses to the taxpayer in the future. The NAMA approach, as described by Peter Bacon, is certainly to borrow a great deal and get much of it back. The scale proposed for NAMA is too large, however, and I have said that before. The €80 billion to €90 billion is a definition of a class of assets, including performing and non-performing assets that he wants to fold into NAMA. All those assets should not be folded into NAMA whose ambition should be not to borrow more than something around the €20 billion mark. That will give the banks enough of these safe, sound marketable assets to go on with. It will not solve the recapitalisation problem, which will take many more billions. If it only pays a reasonable price, NAMA will get all that €20 billion back but the Government will not get back some of the money it puts in. That is the part below zero, which I have described, that could be as high as the IMF said. It could even be higher, but my guess is that it would be lower than the IMF has said.

The amount we can be sure about is the one above zero; that is the €15 billion, which is easier. There has been much discussion about why we should give the shareholders that. I am being put in a corner somewhat on this, but there is one way I would do it. I should declare an interest because my wife has some bank shares — that is true, but they are not worth very much now. I suppose we all have bank deposits and must remember that bank depositors have been bailed out in this process. From the State's point of view, however, — which is where I am coming from — if it nationalises, it will have to pay compensation. I guess that at best — in other words, at the lowest price — the State will have to pay something like the stockmarket valuation of recent times. I doubt if the courts will let the State get away with that, although they might. So I assume that as regards the €1.5 billion floating around in shareholders value, one thing the taxpayer can do is to say "Here is €1.5 billion in cash, because the courts won't let us away with any less". The other thing to do is to say "Well, we've got this €1.5 billion, let's use it as a buffer, protecting the State from itself as that minority shareholding". That is where I see the money coming from. I do not see it as a gift to the taxpayer. If lawyers tell me I am wrong and that the taxpayer will not have to pay a penny to compensate the shareholder, then that would very much weaken my argument that says "Yes, let's leave them with 5% or 10% instead of paying them cash". I am not trying to provide a free gift for the shareholder. As Professor Whelan said, the shareholders have not done anything to warrant easy treatment.

On the other subordinated claimants that are not guaranteed, there is no issue of default arising in that. Deputy Morgan talked about that. One can look at history to see what happened to countries that default. We could have an academic discussion about it. Some of them have done very badly, while others came out of it after 20 years. I do not think we are in this territory. I could talk separately to the Deputy about that and give him some interesting references, but it is hairy territory.

I think those are the particular points that were raised.

Professor Karl Whelan

On the €50 billion cost, Professor Honohan is right that different figures are being quoted around four different things. One way to think of this is in terms of net and gross national debt. If we issue €50 billion in bonds to buy €50 billion in assets, the headlines in the newspapers the next day will be "National debt increases by X%", but of course national assets will have increased by €50 billion, as long as that is what the stuff is worth. The sum of €50 billion is getting into pretty decent write-downs. One must remember that the worst that happens is that we get to take over the assets that underlie the loans. We are told that average loan-to-value ratio for property development loans was 70%, so we have to factor that in. It seems a little low to my mind, but that figure has been bandied about.

The relevant issue there is how do international financial markets see our net solvency, if we go and do a transaction like that. There will certainly be guys in London who say "They've just taken on €50 billion of debt". There are guys in London who say "We are guaranteed 900% of GDP". There will always be people who say silly things. My reckoning of it would be that the serious debt analysts would look at a transaction like that and say "The net solvency of the State is the same, as long as the stuff if worth €50 billion". It would be perceived in a parallel manner to the National Pension Reserve Fund in the sense that we had a particular stated debt-to-GDP ratio, but there was also the National Pension Reserve Fund. There may be issues with the way the EU wants to treat these figures, but that is a secondary concern.

The question of defaulting to the bondholders is a risk that I suspect we do not want to take. There are arguments that we should not have given as wide a blanket guarantee as we did, but there could be negative consequences in the signal that it sent to financial markets. One must remember that with the scale of debt we are accumulating, an extra 1% or 2% of default risk on our debt, because we are perceived as maybe less trustworthy characters, starts to pile up. So maybe we have not really saved ourselves anything in the long run.

One other issue that was raised was the question of compensation for stockholders. I recommended that the shareholders be paid the market value if the Government was to take over. That is a value that is trading on the shares today and it is the value the market has put on them, although I would make a couple of points on that. When the UK government nationalised Northern Rock and appointed an assessor, the assessor came back and said that the business was not worth anything.

Professor Patrick Honohan

He has not made any judgment.

Professor Karl Whelan

He has been saying things like that.

Professor Patrick Honohan

There has been no judgment on that.

Professor Karl Whelan

There has been a challenge in the High Court.

Professor Patrick Honohan

There has been a challenge to the procedure, but there has been no statement on what it is worth.

Professor Karl Whelan

It has been understood that they will get——

Professor Patrick Honohan

Little.

Professor Karl Whelan

Little. I am not a lawyer, so the limits of my legal understanding wear out pretty quickly. My understanding, however, is that Northern Rock shareholders are not expected to get much. There is another point, which is that if we are talking about banks that may be insolvent — in the sense that their loan losses are greater than their equity capital — why are they trading for a €1.5 billion combined value on the stock market? For some time, the biggest influence on the share value of the leading Irish banks has been hope value. Their hope is that the bad things we talk about for the taxpayer may come to pass. It is actually encouraging.

Professor Patrick Honohan

I agree. It is option value. Essentially, one holds them in the hope someone will pay something from them.

Professor Karl Whelan

I do not envisage a legal problem arising if the Government figures responsible for dealing with NAMA and the like were to make it clear what they believe to be a fair price for NAMA to pay or at least if they were to stop making statements which do not appear to be credible, for instance, that AIB or Bank of Ireland only need €3.5 billion. A clear signal should be sent that the taxpayer will not overpay for the assets. This does not just mean repeating the statement that the taxpayer will not overpay for the assets but stopping saying things which, when logically put together, add up to saying taxpayers will overpay for the assets. Such things would have a negative effect on the market value of the shares. This issue is not independent of actions the Government can take.

People speak of bad and good banks, new and old banks and so forth. Fixing the banks which have an established retail presence and managers and branches in every town by recapitalising them is probably a better mechanism than creating a new bank. After all, banks are somewhat complicated. While we could, in theory, put in €1 billion and leverage this figure upwards to make €10 billion in loans, we would have to secure €9 billion in borrowing or deposits to do this. The banking structure is in place and it is a case of fixing it. This seems to be a better approach than creating new State-owned banks, although that is not to say the existing banks cannot end up as State banks.

Deputy Seán Barrett

I thank both guests for sharing their views in what has been an informative discussion. I sincerely hope the Government will, through our guests, learn a lesson that we should not rush this. The discussion also confirms that the pain imposed on the taxpayer in the past six months will be chicken feed compared to what we will face if this goes wrong. Wider discussion and wise counsel are needed before final decisions are taken.

I will leave aside my personal views as to whether nationalisation is good or bad in the current circumstances. What is needed is a mechanism which will restore confidence in our financial structures. One can attach a value to anything. If measures to address the banking problem do not work, further losses will be incurred and buildings will remain empty and, therefore, worthless. Above all, we will have mass emigration again, which means fewer people will contribute to the pool, demand for homes will decline and vacant houses will remain empty for much longer. The consequences will be serious.

Nobody knows what the banks' assets are worth because confidence has been lost. We need to find a mechanism which will re-establish confidence. Who is qualified to say what value one attaches to any asset? I do not know of anyone, even someone abroad, who is in a position to state what should be paid for the banks' assets. Professor Honohan's idea of making available a specific sum is the correct approach because it would help stabilise notions about values. Money is not available to buy assets.

Confidence is vital. I am worried about the lack of confidence in the banking system. No one will lend to or invest in a bank if information on likely losses is not available. This issue should not be treated on the basis of one's position on nationalisation. It is a stand-alone issue which needs to be judged on the basis that the best solution must be found. In circumstances such as this, political views are irrelevant.

Many could make a valuable contribution to decisions on what action should be taken to address problems in the banking sector. I hope all parties will try to reach a consensus on the way forward, as we are in a frightening position. The sums are horrific in their scale if one considers the pain imposed on members of the public to generate revenue of €1 billion. It is possible addressing this problem could cost from €20 billion up to €60 billion. How will we pay for this when people are leaving our shores daily and more houses and properties are becoming vacant? I regularly pass a vast new development of apartments and office space at the Merrion Gate which will lie idle for years if we do not find the correct solution to the banking problem. Given its location, this is probably one of the most expensive office and residential developments in Dublin.

I hope that as a result of this discussion with the two experts before us, the joint committee will make known to the Government its views on the matter. I also hope many more experts will agree to come before us. We should not rush into taking action on an issue such as this. I will not leave this meeting with a firm view on whether the banks should be nationalised or another form of bad bank should be established. More discussion is needed and I hope wise counsel will prevail.

Professor Karl Whelan

It is certainly the case that the figures are scary when one examines the range of potential outcomes. When these decisions are available to us, we should do everything in our power to minimise the total cost. That said, to repeat a phrase Professor Honohan used in a different context, in thinking about Government debt one needs to make a distinction between stocks and flows. If we were to take action tomorrow which solved the banking crisis at a cost of 30% of GDP — this figure has been bandied about — it would cost real money and all the debts would have to be paid back. On the other hand, when one looks around the world, other countries have sustained debt to GDP ratios of varying amounts. One could add 30% to Ireland's GDP and the country would probably be fine. However, what tends to concern sovereign bond markets and international debtors is when they see large fiscal deficits — this is veering into the other problem we have — of very large amounts of GDP which look as though they will add up. If we were to run deficits of 10%, 11% or 12% of GDP and considered to be unable to deal with them, it would, in the long run, add up to an awful lot more. If the adjustments made, either in terms of taxes today, taxes raised or expenditure cuts, add up to €1 billion today and are made permanent, they will also amount to €1 billion next year and the year after and so on. This will add up to a significant amount. In that sense, I countenance we have time to sit and make the best decisions about this. It may cost a lot, in terms of the final cost for GDP, but on its own it does not have to be a threat to fiscal sustainability.

Senator John Hanafin

I thank the witnesses. Regarding the ex post, in other words, the subsequent valuation of the assets, I believe economists study the dismal science and have correctly predicted 14 of the last three recessions. An economist recently said publicly that this situation was never ending, which of course it is, and such a prediction was patently wrong.

In light of the experience in First World countries such as the US, Sweden, Finland, Spain and others, is it reasonable to expect that if there is a subsequent large upswing, we would again have recourse to the banks? This could happen by virtue of the fact there is a strong possibility one of the methods which would be used would be a mixed method of buying the asset and the banks retaining a share in it so they remain independent and continue to benefit from any subsequent upswing, something which is inevitable, even if it takes time. Recourse is very important in case there is a major advantage in years to come, because we have seen boom and bust, and when the good times come, all boats rise.

Is it significant that these bank recapitalisations and national asset management agencies have been successful, particularly in First World countries?

Professor Patrick Honohan

They have been more successful in First World countries than in Third World countries, which tells us quite clearly that the governance structures and, above all the transparency, are important. It must be much more transparent than banking is today. People will not be satisfied to have things done behind closed doors. In our discussions nationally over the coming months, there must be more transparency. There is some reason to hope it could work out.

Professor Whelan is very interested in one angle of this. In terms of balance I find myself almost defending NAMA. I am not trying to set out to do that, because the most important thing is to protect the taxpayer, get the valuation correct and make sure one is not handing things away. We can only hope NAMA will be operated well and there is a better prospect of that than in a Third World country. The question of whether the banks should get the benefit of an upswing was asked. The banks should not get the benefit. I see no basis for it. They are close to being wiped out.

To ensure we are not overpaying for the assets, NAMA should bid low and tell the bank it will definitely get a particular amount, but the shareholders of the bank will get the upside. That is the distinction I make. The shareholders, rather than the banks, would get the upside. The shareholders might be prepared to agree to that. The reason for separating it from the bank is the whole logic of NAMA, namely, to remove it from the thinking and management of the bank so it is moving forward and looking to see where it can do good business, how it can lend to SMEs, get new business and not be preoccupied with the past. That is an important distinction.

This is not nationalisation versus not nationalising. That is a secondary issue. The major issue is getting the banks on their two feet again. Having a new bank may be an idea. I do not think the existing large banks are in a situation where we can say we do not need them any more and start afresh. I do not think anybody is really at that point. We have to get the banks functioning again, whether one wants to go down the road of bringing in a new institution, which is a different issue.

On reflection, when one thinks of the branches all around the country and the normal things people do when they are banking, such as get their paychecks, write cheques and send money to their granny, there is an entire structure which, by and large, works. We need to get that working and normal lending can go forward on that basis.

Deputy Joan Burton

I have a very simple supplementary question. All the people I met from Sweden stress over and over again that transparency is the key element in a very difficult scenario where one is making decisions and trying to make the best out of a range of extremely difficult choices.

Would the witnesses offer any advice on transparency methods? They have worked on banking crises and I understand Professor Whelan worked for the Federal Reserve in the United States, as perhaps has Professor Honohan. They have a lot of international experience. From the point of view of the functioning of the Dáil, today we had the announcement of the name of the person who is to be the managing director of NAMA. I have no views about the individual. He is probably excellent.

However, in our system the Minister has all the aces in his hand because he names and nominates all the members of the shadow NAMA board which, we understand, will be announced next week. In the United States, if the chief justice or anybody else on any board is being inaugurated, as a citizen I can go along and listen to questions being asked, not about their past and whether they were involved in this or that, but the fact that in their past they had this or that assignment or interest and, therefore, how this reflects on the new task they are being nominated to take up.

In America and the UK one can question people who are the senior appointees or nominees to boards and can do so without trying to destroy the person who is offering to go on it. That is important. There are also congressional oversight committees, which report from time to time about how certain elements are proceeding.

I speak as a member of the Opposition and we are coming up to elections. There is a need for bipartisanship in the national interest, which does not give Government a free run with no questions or transparency. Are there models around the world? Perhaps we could look at a transparency model and at questioning people, not to destroy their offer to participate or interest in participating, but to help us get out of the hole we are in as a country, where we only learn afterwards that somebody has something in the background that seems to compromise him or her unacceptably. The media then make a field day of it, the person steps down and we are back to being in the hole again.

I ask both witnesses, in the interests of perhaps trying to develop some kind of bipartisanship——

Chairman

This is somewhat beyond what the witnesses came before the committee to discuss.

Deputy Joan Burton

It is what has happened.

Chairman

It is a very interesting subject and I am sure when Deputy Burton is next in government she can talk about it.

Deputy Joan Burton

Transparency, as the Swedes said, is key.

Chairman

If the witnesses wish to make a comment, there is no problem.

Professor Patrick Honohan

I certainly would not have any problem with what Deputy Burton suggests as a procedure. I am not in any way an expert on issues of governance, parliamentary oversight and that sort of thing. I see no difficulty along those lines. Sometimes there are issues about the European Central Bank and often it can go to the Parliament, but it comes before the Parliament in a somewhat constrained way. I see no such sensitivity arising regarding a debt recovery agency.

It is particularly confined to delinquent loans. There should be complete openness. I have no difficulty with the Deputy's specific proposals. There would be protection for the Government were it to float names and have discussions so that the whole process is out in the open. I see no problem with that. However, it is important that this transparency be maintained into the future and that light is shone on what the agency is doing, who it is doing it with and what it is getting. That may require changes in banking secrecy legislation.

Deputy Seán Barrett

Is it not important that somebody should stand over the price that is to be paid for these assets and the basis on which that evaluation is made?

Professor Patrick Honohan

Absolutely. That is crucial.

Professor Karl Whelan

If the National Asset Management Agency is established in its proposed form and spends some €50 billion in acquiring these assets, then we are talking about an enormous operation. No private sector asset management company, no hedge fund or pension fund, would run a €50 billion fund without ensuring the best people were in place to eke out the best possible return. This is one of the questions in regard to remuneration in financial markets. Some of these people are so well paid because the ability to obtain an additional 0.5% return on a €50 billion fund is something very substantial. Given the moneys at stake, I hope the recruitment and staffing of NAMA is approached in that light.

Chairman

The same consideration must be given to the reporting function.

Professor Patrick Honohan

Yes, we must know exactly what is going on. People will do lots of strange things to obtain a small, invisible percentage of €50 billion.

Chairman

I thank the delegates for giving so much of their time to the committee. We are grateful for their comprehensive presentations and their comprehensive replies to members' questions. The discussion we have had today points to the difficulty of the decisions to be made by the Government, and governments throughout the world, in finding solutions to the problems we face. The delegates' contributions will assist us in our dealings with other witnesses who will appear before the committee to discuss this matter.

The joint committee adjourned at 4.35 p.m. sine die.