The purpose of the meeting is to have an exchange of views between the committee and the Minister for Finance on the draft National Asset Management Agency legislation published on 30 July in advance of the Second Stage debate on the Bill on 16 September. I welcome the Minister and his officials and thank him for providing this opportunity for the committee to discuss this important legislation. I will ask him to make an opening statement which will be followed by statements by Opposition spokespersons.
Draft NAMA Legislation: Discussion with Minister for Finance.
Before the Chairman does that, I would like to raise an issue for members of the committee who will take part in its deliberations. I refer to the issue of interests members may have relating to banks, development or loans. Will the Chairman ensure declarations of interest are fully delivered to the committee in respect of anyone contributing, as required under ethics legislation?
Yes, I will take note of that matter. I am sure members who have interests will declare them before they make a contribution.
I ask that the two Opposition spokespersons be given an opportunity to outline and brief the committee on their alternative proposals to NAMA.
I thank the Deputy.
I ask the Chairman for clarification because this issue has arisen previously in regard to important committee proceedings. Should members who have interests in bank shares or development and development loans or, in some cases, have impaired loans and assets make declarations at this time? It is important in the interests of clarity under ethics legislation governing both Houses of the Oireachtas and its committees.
The Deputy has raised a fair point and it is up to members who have interests to make them public.
I call on the Minister to make his opening statement which will be followed by statements by Deputies Bruton and Burton and a general question and answer session. Is that agreed? Agreed. If the Minister's officials make a contribution, perhaps he will introduce them at a later stage.
I will introduce them in the course of making my statement. I have no interests that I require to disclose to the committee, unless a loan on one's principal private residence qualifies.
I am pleased to discuss the Government's legislative proposal to establish a national asset management agency and to debate the draft consultative legislation with Deputies and Senators. The Government first announced its intention to establish NAMA in the supplementary budget in April. Draft legislation was published at the end of July to enable Oireachtas Members and the public to examine the proposal in detail and contribute constructively to this important initiative. I acknowledge the contributions received from both Fine Gael and the Labour Party and the comments received from other interested parties. I intend to deal in detail with some of the issues raised later.
I would like to deal briefly with some of the key aspects of the draft legislation. It is evident from the huge attendance at today's meeting that the legislation has already been the subject of a significant amount of study. To assist the committee in dealing with its time constraints, I do not propose to read the section of my speech that sets out the provisions of the draft legislation in detail. I will answer members' questions later in the meeting.
I am accompanied by officials from the Department of Finance, by the interim managing director of NAMA, Mr. Brendan McDonagh, and by Mr. John Mulcahy, who has extensive experience in the property business and is on secondment to NAMA. If the Chairman does not have any objections, I may ask Mr. McDonagh and Mr. Mulcahy to speak on certain technical issues. It is obvious that policy is a matter for me, as Minister for Finance in the Government. It is clear that my policy on some issues is capable of being adapted, having regard to what I hear today.
I will set out the context for this debate before I deal with the substantive issues in the legislation. As I have noted, the draft legislation was published last month to provide for a detailed process of consultation. In July, I said I intended to bring the NAMA Bill to the Dáil on 16 September as part of a wider debate on the future of the financial sector. The significance of this proposal cannot be underestimated. The Government intends to have a substantial debate on the NAMA Bill and to accommodate constructive proposals. As part of this consultative approach, I am happy to engage with the Joint Committee on Finance and the Public Service today. I am aware that the members of the committee are familiar with the events of the past two years. The effects of the difficulties in the financial markets are now being felt in the real economy. Members are also familiar with the Government's efforts to stabilise this country's financial system. The banking system is unique. Its proper functioning is critical to the smooth running of the economy and the supporting of economic recovery. Therefore, it must be protected by the Government. Nothing is more fundamental to our return to the road to recovery than the repair of the banking system.
The Government has taken a number of successful measures to stabilise the banking system and to protect depositors. It has guaranteed certain bank liabilities, including deposits, recapitalised Allied Irish Banks and Bank of Ireland, and nationalised Anglo Irish Bank. These measures have allowed the banks to raise the funds they need to support their operations. They have ensured that citizens and businesses can go about their daily business in the knowledge that their funds are secure. By taking the actions I have mentioned, we have managed to stabilise the financial system. In addition, financial benefits have accrued to the State from the annual fees related to the guarantee and income has accrued to the State from the 8% preference shares in Allied Irish Banks and Bank of Ireland. The State holds warrants, or options, to acquire a 25% shareholding in Allied Irish Banks and Bank of Ireland. The shares in question are increasing in value. However, we must do more.
The ongoing concern about the impact of risky loans on the banking system is continuing to create funding difficulties for the banks and to restrict the flow of credit, as banks focus their resources on these troubled loans. Every euro loaned by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else. Irish banks rely heavily on institutions abroad for funding. Uncertainty about the scale of losses on banks' balance sheets has made this liquidity more difficult and costly to attract. If banks remain unsure about the losses that will eventually result from these loans, and nervous about the adequacy of their capital, they will not provide the credit that is needed to support economic recovery. There is a general consensus that a resolution is urgently needed. Our economy will be hampered if we do not have a banking system that is capable of providing credit to viable businesses and households as the recovery kicks in.
Following an assessment of the options available to deal with these risky assets and the recommendations of skilled advisers, the Government decided that the establishment of an asset management agency was the best approach. This model has been supported and recommended by banking experts across the world. In the past, it has been used successfully in many countries as part of the work-out process of problem loans. The proposal to establish NAMA has been widely supported internationally by bodies such as the IMF and the OECD. Since the announcement of the establishment of NAMA in April, bond spreads above the German benchmark for Irish sovereign debt have halved — from almost 3% over ten-year German bonds to just 1.5%. Irish ten-year bond yields are now 4.8%. We are used to thinking of interest rates as being imposed on us from outside, but in current market conditions the interest rates that Ireland pays on its debt will be heavily determined by the maintenance of appropriate fiscal and financial market policies.
It is important to note that Ireland is not the only country that is developing a policy solution to deal with the uncertainties surrounding certain asset classes. If I were to make one criticism of the public debate on NAMA to date, it would be that we appear to be living in isolation from the wider world. The Irish experience has been mirrored in the United Kingdom, Germany and the United States. These countries have all put forward schemes to deal with impaired assets, which are tailored to the specific problems faced in each country. In Ireland, the problems associated with land and development based lending are best addressed by transferring these assets to an asset management agency. Since April, when the announcement to establish NAMA was made, detailed preparatory work has been undertaken both in the preparation of a legislative basis for the agency and in advancing the practical preparations necessary to ensure NAMA is up and running as soon as possible. We are also in ongoing detailed consultation with the European Commission and have sought the opinion of the European Central Bank. The NAMA legislation has not been drafted in isolation and reflects the input of a number of international organisations and specialist advisers.
I will pass over the section of the speech, as circulated, which deals with the key parts of the legislation because I assume the Bill has been examined by the members present. I indicated I would return to the issue of valuation, which is the issue drawing most attention in the public discourse. The draft legislation provides a framework for the valuation of loans which must be approved by the European Commission. Commission approval is an absolute prerequisite to the operation of this aspect of the legislation. The basic premise of the valuation framework is that NAMA will pay significantly less than that at which the bank values a loan. The value to be paid has been defined with regard to EU guidance as the long-term economic value and strikes a balance between providing support to the banking system and minimising any potential risk that NAMA will make a loss.
The success of NAMA is not based on any assumption of a return to the recent bubble prices for property. It is a myth that has gained some currency during the summer that there is some intention that the amount NAMA will pay will compensate the banks for a recovery in values back to the unsustainable peak property prices of 2007. This is not correct, is nowhere near correct and has never been proposed by the Government. Perhaps it is a reflection of wishful thinking among interested parties. Using the valuation methodology in this legislation, it would be a long number of years before Irish property values would return to the peak of late 2006 and early 2007. Such an approach would not be countenanced by the Government and would not pass muster with the European Commission whose approval for the valuation process is required. NAMA will not pay anything other than current market value for certain assets where this is the appropriate approach.
I will run through the process for the valuation of an asset to assist an understanding of the Government's proposals. It is important to remember that, based on information supplied by the financial institutions, our assessment at this stage is that a borrower typically provided about 25% of the purchase price for the underlying asset and borrowed the other 75%. In the event of a repossession, prices have to fall by more than 25% from the peak of the market before the bank makes any loss in terms of the security. While we are all aware prices have fallen more than 25%, the first 25% decline in value is borne by the borrower. This fact has been lost in much of the commentary by some contributors to the NAMA debate because the percentages which are envisaged as reductions are reductions in the value of the money loaned by the financial institution rather than in the underlying value of the collateral which secures the loan.
As I indicated, from our analysis of the bank books to date, typically about 25% of the purchase price for the underlying asset was provided by the borrower. The person who is most at risk is the developer who is in default because clearly, given the fall in property values, this initial investment is wiped out by virtue of the operation of NAMA in the context of a borrower who is in default.
The valuation process will operate as follows. First, independent valuers will value the security for the loan. Often, the value of the security may be greater than that of the property purchased. Valuation will be in accordance with recognised red book valuation standards, European valuation standards or international valuation standards, as appropriate. The security will, therefore, be valued first. The security or collateral for the loan only comes into play where there is a non-performing loan. Where a performing loan is taken by the State under this exercise, it has attaching to it its book value because it is performing.
Following the valuation of the security and in line with Commission guidance, NAMA will adjust the value to reflect the fact that while the market for this security is currently illiquid, it will not remain so. This recognises that these assets are at crisis values and that the fundamental long-term value, having regard to cash flows and longer time horizons, is appropriate. There is nothing unusual in this. In much of the public debate the suggestion has been that there is some form of conspiracy between the Government and the banks to enrich shareholders. In fact, this is the basis on which all assets in United States banks are currently valued under the accountancy standards that apply in that jurisdiction.
The adjustment will be based on a detailed assessment of market indicators such as the Department of the Environment, Heritage and Local Government's housing statistics bulletins, as well as broader macro-economic statistics from sources such as the Central Statistics Office and the Central Bank. It will have regard to data relating to property yields and capital value movements. I reiterate, in having regard to past data, that evidence relating to the recent bubble must be excluded. This property valuation information, as adjusted, will form the basis for the calculation of the loan value. The loan will be valued based on current market pricing to establish its current market value. The loan will be priced by reference to NAMA's cost of capital to calculate its long-term economic value. The overall value will be adjusted by reference to adjustment factors and expert reports as set out in sections 58, 59 and 63 of the draft Bill.
I thank the Opposition parties for the detailed comments received on the draft legislation. I propose to deal up-front with several of the issues raised and I am sure some of them will be covered in more detail during the question and answer session. For the sake of the general political system, it is worth pointing out that a substantial amount of work took place during August on both the Government and Opposition sides in regard to this proposal. The timing of today's meeting reflects the fact that the holiday periods of the various spokespersons and mine did not coincide. However, an amount of work has been done on this proposal in the course of this month by all of the parties.
Much of the public debate in recent weeks has revolved around requiring losses to be distributed among shareholders and bondholders. I have stated on numerous occasions that if, after the introduction of NAMA, the banks require capital, this capital will be in the form of an equity stake. This will dilute the current ownership of shareholders. We are all aware that share prices in the Irish banks have fallen significantly from their peak prices in early 2007. Many shareholders have already lost vast sums, in some cases as much as 90% of the peak value, and are likely to lose more if their shares are diluted further. With regard to bondholders, a large amount of subordinated debt has been bought back by the banks in recent months at a significant discount with the result that bondholders took substantial losses relative to the face value of the bonds. This was organised in such a way that there was no event of default. The bondholders were given a choice and they took it. Buy-backs by the three largest banks have resulted in losses of almost €4 billion on face value for these bondholders but resulted in accounting gains for the financial institutions which have increased their core capital.
It is important to note that the bulk of the bonds in issue by Irish banks are not subordinated debt but debt of a far more fundamental character. They are ordinary senior debt bonds entered into by the banks. There is a perception in the media that senior bondholders are natural risk takers, aiming to achieve high rewards for taking high risk. That is not the case. Senior bondholders are usually and typically pension funds, insurance companies and other long-term providers of debt. I have pointed out in recent days that they also include credit unions. These bondholders provide loans for viable entities on the basis that they are senior to other creditors and are secure. In other words, they are in the same position as depositors. These same senior bond debt investors also buy Government debt and are an important source for keeping the economy funded. These senior bondholders are guaranteed under the Government guarantee scheme. Any suggestion these parties should be invited to consider a reduction in the amount repayable to them would have catastrophic effects for the banking system, the funding of the State and the wider economy. Many of these senior bondholders are trading companies in Irish commercial life with substantial numbers of employees.
This is the key criticism of the set of proposals made by one of the Opposition parties. Fundamental to its proposals is a threat to default on significant levels of bank debt. This would have a severe detrimental effect on the remaining banks and the State's ability to fund itself. The Government does not accept that the best interests of the State would be served by allowing a culture of default or potential default to develop. This would undermine financial stability and result in the need for further action to rescue the banking system. I have already made it clear that the Government considers that these proposals are not workable and lack sufficient detail for serious examination. The Irish banking system, like all other banking systems, must continuously replenish its funding. Deposits, short-term commercial paper, note issues, short and long-term bonds must all be refinanced on a regular basis. The scale of this refinancing is far greater than the scale of refinancing in which the State must engage. The ability to do so depends on a fundamental belief on the part of the investor in the viability of the investment and the stability of the institution concerned. Who would invest at a rate of 5% or 6% if they felt there was any serious risk of default? Who would invest in Irish financial institutions at a rate of 5% if they were advised that the institutions were being stress tested for another year, and that at its conclusion, consideration would be given to defaulting on these instruments? What are the collateral risks to the State? We need to work together on this problem for the sake of the country. While we can make constructive proposals and work with them, I do not believe that defaulting on senior debt should be on the agenda.
Some ambiguous comments were made about this by the Fine Gael spokesperson, and he took issue with the fact that I waited for a number of days to reply to him. I did so because I brought the matter to the attention of my colleagues in the Government, looked very carefully at what he said and tried in every way to put the best possible construction on it. We cannot have this question of default on our agenda in this banking debate. The reality is that the spreads on Irish bonds have dramatically narrowed over this summer, and that is a mark of the confidence which investors around the world are seeing in the determined, decisive, aggressive action that is being taken to correct our financial problems and our banking problems. We must maintain that momentum. We cannot fail to resolve this issue. I am more than available to provide whatever confidential briefing the Opposition leaders and their finance spokespersons may require. I am more than willing to put our investment advisers at their disposal to work through whatever proposals they have, but these are important issues and we should not be distracted from what is a highly complex, technical area, where we have to create public confidence in what we do as well as confidence from markets abroad. In such circumstances, there is an onus on all of us to work together on this problem. Of course, it is the absolute duty of the Opposition to hold the Government to account, and to critically evaluate any proposals that are submitted before them.
The Labour Party has put forward a proposal which I think involves the nationalisation of the entire banking system. I do not want to criticise the party in too much detail, because I am not quite clear on the exact scope of the nationalisation proposed. Though not suggested by the Labour Party itself, there are many under the illusion that nationalisation will address the problems facing Irish banks in some kind of cost free way. This is clearly not the case, as the troublesome assets will have to be dealt with in either event. The shareholders in the two main banks would have to be compensated before the State sets about putting additional capital in to resolve the capital deficiencies from dealing with the impaired assets. However, a policy of total nationalisation of the banking sector contains other risks. It may impact negatively on financial institutions' own funding and on sovereign funding, because it could affect market sentiment towards the banks and towards Ireland. The concentration risk would dictate that investors would draw funds from certain banks if they are effectively owned by the same owner. In simple terms, counter parties cut credit lines to nationalised banks.
Anglo Irish Bank provides an example of the challenges faced by nationalisation. Nationalisation did not fully address the bank's funding difficulties. The Government was still forced to inject almost €4 billion to date in capital, following serious losses on the loans. Nationalising the entire banking system would inevitably result in Ireland's sovereign credit rating being downgraded from AA. This would result in increased debt service costs on the national debt, which the country can ill afford when it has so many other pressing calls on its resources.
I would draw the attention of the committee to the words of President Obama last April, when explaining his opposition to blanket nationalisation. He said that "Pre-emptive government takeovers are likely to end up costing taxpayers even more in the end and....are more likely to undermine than create confidence." He went on to say that "Governments should practice the same principles as doctors: First, do no harm." So that is what President Obama thinks of the policy of blanket nationalisation. That view is shared by many countries around the world and is the view of the Government. Furthermore, I believe strongly that in so far as is possible, the banking sector should have a presence in markets and should operate within market disciplines and constraints. The key objective of meeting the lending needs of the real economy is best met by achieving this in a commercially focused banking system. However, as I already have noted and as the IMF pointed out in its report on Ireland, some institutions may need capital after they have transferred loans to NAMA. This will increase the State's ownership in such banks and in some cases may result in a majority shareholding. While I have made it clear I have no difficulty with this, this proposal is a far more discriminate and effective policy than blanket nationalisation.
It always has been the Government's policy that some form of risk-sharing mechanism would be included in the NAMA process. I have stated from the outset that should NAMA be faced with losses down the line, consideration must be given to the imposition of a levy or some equivalent measure. While I expect NAMA to make gains over its lifetime, I am open to examining other risk-sharing mechanisms. Proposals made to date include giving banks equity in NAMA. This proposal has difficulties of its own, including how it would be valued on bank balance sheets, which could indirectly necessitate further injection of State capital. This proposal also would give banks access to the upside at the expense of the taxpayer. However, the risk-sharing proposals merit further consideration and I would welcome and evaluate any proposals the Opposition may make in this regard. Although all these aspects are under review at present, in the final analysis, NAMA must lead to a cleaner and less risky bank balance sheet. If it does not so do, it will not achieve its key objective.
I wish to make a final point by addressing the constant inaccurate commentary which proposes NAMA as a bailout for borrowers and developers. Nothing could be further from the truth. As NAMA will have acquired the loans at a significant discount from the banks' book value, the agency will be in a position to be far more aggressive with borrowers if it deems it necessary. The draft legislation also contains a number of provisions that will assist NAMA in its dealings with developers and will ensure every last cent due to NAMA will be pursued vigorously. I have been amazed to hear in public debate that the purpose of acquiring the aforementioned loans is to reduce the amount borrowers owe. Borrowers will continue to owe the full amounts on foot of the loans and this legislation contains nothing that changes this.
Equally, I have been shocked to hear from some quarters that when enforcement proceedings are taken, NAMA will acquire the assets, that is, the collateral which backs up a loan or in other words will repossess the property and that in some way the agency then will hand it back to the delinquent borrower a few years later. Again, that is not the case in this legislation. While all members of this joint committee are aware of this, the public is not. This illustrates how important a collective responsibility members have in this debate to ensure the facts are put before the public in order that they can make a fair judgment on them and that members can have a debate of that character.
The proposal for the agency is designed to cleanse the balance sheet of Irish banks in order that they will focus their resources on doing the essential job they should be doing, namely, the provision of credit. This is essential if this economy is to embark on the road to recovery. The draft legislation reflects detailed consideration of how NAMA will need to operate to protect its investment and generate a return for the taxpayer. I am anxious to hear all views on this significant policy proposal and I believe the draft legislation will benefit from today's engagement at this committee.
First, I wish to declare that all my interests are set out in the public declaration of interests. They include being the owner of bank shares, which is on the public record and is not news to anyone. I welcome the Minister's appearance before the joint committee and it is the first time members have had an opportunity to engage in an exchange of views. I share his sense that we are in a grave situation. This has been brought about by a property bubble that was fuelled by bad decisions, including decisions by the Government, as well as by an unwillingness to confront the problems and at times a contemptuous dismissal of those who questioned whether this was based on sound economic fundamentals. This is accompanied by a public finance crisis of enormous proportions whereby effectively the Government spent money based on revenues drawn from an unsustainable property bubble. In the process, we have destroyed our economic competitiveness, as was illustrated just last week. I have no illusions about the gravity of the challenges we face. Our approach has been that the solution to the banking crisis must be effective in order that we see credit flowing as one of the consequences; it must be the least costly way of delivering an effective solution to the banking crisis and it must be fair. These are the principles that underpin our alternative.
As we come to this debate we do not yet know the cost. I am surprised the Minister has not commented on his cost calculations because I understood they were to be available to us within a fortnight and I thought we would be learning something of them at this stage.
The effectiveness of the proposed NAMA in getting credit flowing has been the source of considerable doubts for many people more learned than me. Again, it is surprising that neither the Bill nor the Minister offers any guarantees on how the NAMA process, with all of its attending cost, will deliver credit to small businesses at a time when they are clearly struggling to gain access to credit. Its potential to be unfair is enormous; that goes to the heart of much of the debate, as the Minister acknowledged in his contribution.
Today's debate is not primarily about our solution; rather it is about NAMA. Our approach would be to tackle the immediate credit crisis first. That is why we believe a national recovery bank would have a significant role. It would be our preference to have one playing a role now in getting credit flowing immediately. We have a record of having such banks. There is an EU model as covered asset banks have been used elsewhere and the ECB has backed them. We also believe that essential to any solution is that those who made investments in the banks must continue to share both the risk and the responsibility for working out these solutions. That is why we have sought a two-phase proposal.
My first point on NAMA concerns what is wrong with it in our view. We are worried about it and it is not out of political opportunism. We are seriously worried that under the Bill, as drafted, NAMA has the potential to be a disaster for Ireland. The taxpayer is being asked to pay a hope value which is substantially above market value. The Minister has outlined how he intends to calculate that hope value. Those who invest will bear no risk or responsibility in the work-out; there is no risk-sharing mechanism as the legislation is constituted. There is no clarity whatsoever on the tough rules of engagement that might apply to developers. Certainly NAMA will have powers but there is no clear policy on how this will be done.
There is alarming scope for political involvement without proper oversight. The Minister has adverted to his acceptance that there is no proper oversight of either the operation of NAMA or of what I contend is the huge scope for political involvement in decisions. There is no mechanism to guarantee that credit will flow as a result of NAMA. Irish people are facing the prospect of €5 billion being raised through tax increases in the next two years and spending cuts of €5 billion and here we have a Bill that is cavalier in its disregard for the potential extra cost on the shoulders of taxpayers involved in the NAMA proposal.
The Minister has stated the process of valuation will be entirely independent. I ask him to consider the following critique. He will stipulate in advance that the price to be paid is not the market price but a different one. He is then guarding to himself the setting of the adjustment factors that will dictate the other higher price to be valued, the so-called long-term economic value. He has provided no process anywhere in the legislation for independent challenge of an excessive payment by NAMA for these loans. He has provided plenty of opportunity for the banks to challenge underpayment but no process whatsoever for the challenging of an overpayment.
Most worrying of all, from the outset he has indicated his intention that the pricing process, whatever way it works, will leave the bank shareholders still in place and therefore there is an upper limit on what discount can apply. That upper limit is set by the existing shareholders' funds. If he wishes to ensure that the shareholders remain intact and that by write-down we do not remove shareholders and wipe out their capital, he is effectively setting a floor on the discount. The discount cannot go deeper than the shareholders' funds.
We have not said that.
I do not understand it. This is my opening statement and perhaps we shall come back to this.
If NAMA decides a €50 billion write-down is to be applied to the loans that are being transferred, and the shareholders' funds are, for example, €20 billion, while the subordinated bondholders hold another €10 billion, it seems that the write-down will wipe out the shareholders and the bondholders. The legislation which purports to allow NAMA be independent in setting its prices has not shown us what will happen if NAMA, acting independently, wipes out the shareholders and the bondholders and is then left further below the water. That is a crucial issue.
On the one hand the Minister is saying that NAMA will be independent and that whatever happens with the valuation the cards will fall where they will and the State may have to put in more money. However, at the same time he is saying the banks will remain in private hands. He cannot pretend these two positions are consistent. To be honest, one cannot pretend that those the Minister engages as valuers — who are supposedly independent — will be immune from the knowledge that the Minister is saying every day of the week that at the end of this process the bank shareholders must be left intact. That may not be a written directive but it is certainly a directive in its implications to those who are setting values. People who set values are fairly flexible in the way they work.
I am worried about the concept of long-term economic value which goes to the core of many people's concerns. We can come back to the huge gaps in oversight, lack of reporting and excessive ministerial involvement but this concept of building the whole structure on long-term economic value is highly dangerous. It is the one that could leave taxpayers with a huge albatross hanging around their necks at a time when every taxpayer is struggling. I do not believe a model exists that will predict with accuracy the direction in which prices will head. Let us not forget the people who are asking us to accept that they can predict long-term economic value are pretty much the same people who told us not so many months ago that the property bubble was based on long-term economic fundamentals. Many of the same people are around the table now telling us they have the answers. The truth is that many crashes have been sustained for very long periods without the bounceback to historical trends for which the Minister hopes. This hope for a bounce back causes me concern. It could be potentially a very dangerous decision.
In his presentation, the Minister stated that the banks have effectively told him — though I did not see the evidence for it — that developers have 25% equity in all these cases. I believe he said that a 25% cut would have to happen before the banks would lose anything. I query that. How much of these loans have rolled up interest in the intervening period, which would suggest that the 25% equity cushion is not there at all? How much of that so-called equity — phantom equity — was actually loans on other property? If the Minister is defending his position on the basis that there is a 25% equity buffer, we need to see the evidence of it, not some glib statement from the financial institutions that this was the model. The question is whether that model was being vigorously pursued. The dogs in the street know that the model was not being vigorously applied and that 100% lending was being given. Sometimes, there was the illusion of a loan on another property, a phantom equity. Is there the buffer mentioned by the Minister? We need to see hard evidence of it. There are other issues about this process on which we must get answers.
I do not wish to avoid the critique of our model and am quite happy to defend that model. We believe that the solution to this issue must be effective in getting credit moving. For that reason we believe a national recovery bank, which gets credit going immediately, is something that can be done quickly and effectively. It would get to the core issue of getting credit moving. I have heard people, including the Minister, describe it as "magic banks". However, it is a serious alternative. There are plenty of precedents for it in other countries; France, Denmark and Norway have models of that nature. Where there is adequate collateral for SME lending, the ECB will accept it and will provide liquidity for it. It means we will use this liquidity to go straight to borrowing, rather than the hope that it goes through banks that are trying to save their skins and might some day, at the end of a process of getting liquidity, use it to fund credit. That is a real worry that the Minister has not addressed. That is the reason we have approached this in a two phase process.
I will be honest and state that I made a mistake regarding the class of bonds in which the European Commission instructed the Government not to pay as debt service and that I used the wrong word for the class of bonds, that they were subordinated debt on which that instruction was made. I accept that was a mistake. However, for the Minister to suggest that default is at the core of what we propose is not the case. What we are saying is that there must be a model in which the banks and those responsible face up to both the risk and responsibility for sorting this out. They have a core responsibility that cannot be shuffled away. The Minister correctly said that some of those bondholders have already, by choice, accepted huge discounts on the value of their bonds. In our view, the backdrop to bondholders making such a choice is substantially changed if the model is that the Government will buy loans from the banks at bloated values, which is what is intended. That has dramatically changed the environment in which decisions by those investors are made. These are professional investors and they make the decisions. If the Government appears to be offering a very generous lifeline that will allow them to recover, they will clearly take a different view of the choices.
The difference in our model is that we are proposing a fairly tough regime which the banks would face after the guarantee expires. We are not proposing, as the Minister suggested, that we would default on new investors coming into the banks. Where new investors came in by putting deposits or other funds into the banks, we have not indicated that we would default on those. The Minister will see in the letter I sent him that we would envisage that those could be subject to guarantee. The Minister must step back a little. Is he saying every private investment in the banks is ipso facto entirely guaranteed by the Government forever? That is the corollary of what the Minister is saying. International good practice does not suggest that professional investors who make big mistakes of this nature should walk away and the Government should indemnify them in their entirety.
There is a difference in approach. There is an issue about taking a harder line regarding professional investors but that does not say we will default. That would create an environment in which the decisions taken by such investors pursuing their self-interest, which is all they do anyhow, would be different from the one created by NAMA, in particular, which will pay a high value for the loans.
I thank the Minister for this engagement because it is important. I hope he will accept we are offering alternatives in good faith and we are also willing to engage in good faith with his proposal, which we do not see as a solution. We see huge fundamental flaws in it but, nonetheless, we are willing to engage and to point out those flaws. Hopefully, we will both benefit from this exchange.
I call Deputy Burton. When she has concluded, I will give the Minister the right to reply and we will then move on to a question and answer session.
I have no registerable interests relating to banks, development companies or builders under ethics legislation. Like the Minister, I have a mortgage on my family home, a bank account and credit cards but it is important, given billions of euro will be made and lost as a result of these decisions, that any member who has such an interest should fully declare it before the committee.
That is a requirement under the committee's procedures.
The approach of the Labour Party regarding the collapse of the Irish banking system has one overriding objective: to prevent what Japan experienced, which was a lost decade of stagnation, falls in asset values, the collapse of the property markets and industries resulting in a zombie economy with a zombie banking system. The Minister, like the rest of us, may have pondered the result of the Japanese election where the Japanese people gave their verdict on the zombie state to which the ruling party of many decades had committed them and, in particular, like the Irish experience, had committed so many of them who had previously enjoyed quality employment to the spectre of long-term unemployment.
I welcome very much the attendance of the Minister and his officials and advisers. Everything we say in the NAMA debate must be considered in the context of having 450,000 people unemployed — this figure is rising — who only a few years ago were making a reasonable living in this economy and were looking after themselves and their families independently. They are more dependent on the State and this Dáil to give them and their families a way out of the spectre of a lost decade for the economy, which is potentially facing us.
There is a considerable overlap in the approach set out by practically everybody in the Dáil. As a former accountant, the approach is based on something accountants are used to doing when businesses fail. When businesses fail, the rule is that one tries to find what can be salvaged and protected while also trying to get rid of the bad stuff. We are trying to get Ireland and the Irish economy back into working operation. We are trying to quarantine the bad stuff — the distressed assets and loans. I refer to development land on the fringes of practically every town and village in Ireland, for example. We are familiar with the spectre of the ghost villages in the upper Shannon that have seven or eight housing developments but hardly a house sold. Over this rather wet summer, all of us have been in NAMA-land. Having seen NAMA-land, we know it is a place with large tracts of zoned land. There is nobody to buy the fine houses that have been developed in completed or almost-completed housing estates. That is what we have to deal with.
At the outset, I have to say that a golden triangle has been in operation in this country, unfortunately, just as it has been in Japan. I refer to the Minister's political party, the developers and the banks. They boosted the property bubble to an unbelievable extent, aided and abetted by the Minister's predecessors as Minister for Finance. The present Taoiseach, for example, did not listen when people like me said——
We have come here today to deal with the NAMA Bill.
I am about to do so.
I ask the Deputy to confine her remarks to the terms of reference of this meeting.
If we are to know where we are going, we have to know where we came from.
That can be very subjective at times.
It is appropriate for the committee to facilitate some acknowledgement of how we got into this difficulty. I would like to speak about a number of specific matters. In the Minister's opening statement, he said that "a borrower typically provided about 25% of the purchase price for the underlying asset and borrowed the other 75%". In his Budget Statement, he indicated that the loans in question had been valued at €90 billion. If I understand his 75:25 ratio correctly, I suggest that he is talking about the loans in the bank having a gross value——
I remind members to ensure their mobile phones are turned off.
I do not think my mobile phone is causing the disruption.
Perhaps it is Senator Ross's mobile phone.
It might be a developer or somebody else in the property business trying to contact somebody in this room. If so, he or she will have to ring back. The Minister indicated in his Budget Statement that the loans in question were worth €90 billion. He said that the developer would have an equity stake of 25%. That suggests an original book value of €120 billion.
That was at the peak of the market.
The Minister is suggesting that the figure is €120 billion. As he said earlier in this meeting, his advisers have been working overtime to identify the portfolio of loans, etc. Can the Minister give this committee certain information it needs as it conducts its analysis? Can he give us a breakdown of the figure of €120 billion? Can he give us a breakdown of the €90 billion figure, which is 75% of the €120 billion figure? Am I correct in assuming that?
Yes.
When the €90 billion figure is grossed up, does it mean that €120 billion was originally on the books of the developer? Was that the development prospect?
The €90 billion figure was provided during the Dáil debate on the Budget Statement. It is best to use it for the purposes of this argument. However, the correct figure may be somewhat short of that when we receive the information we need. For the purposes of this argument, we are as well advised to stick to the €90 billion figure.
Nonetheless, if the Minister's €90 billion figure stands, we will be talking about a gross figure of €120 billion on the books of the developer.
On the basis of a book of €90 billion.
Yes. Will we get a breakdown of the figure of €120 billion or whatever the Minister believes to be the reduced figure? We must have that figure if we are to do any kind of analysis.
I understand from what the Minister stated before a previous meeting of the joint committee and in the Dáil that the loans in question are held by a relatively small group of developers numbering between 300 and 1,000 and that it is a relatively discrete group of individuals. My second request to the Minister is important for the Labour Party. I agree there is a job of work to be done in this process. Regardless of which party's approach is adopted, we must all work on the same set of figures and distressed assets. It would be helpful to the Opposition if we were able to obtain the relevant figures and I welcome the Minister's invitation to Opposition spokespersons to meet his officials who may be available. I ask the Minister to set out the details of the €120 billion and indicate the number of developers involved and the exposure of each developer.
I want to return to general accounting practice. It is important to have a general assessment of the current position if we are to address this issue. Normally in business, the first step taken when a firm is in distress is to produce a consolidated statement of the position of the firm or developer. Even in circumstances where a developer has 100 properties, 40 sites and 60 companies doing different things, those responsible for oversight of the affairs of the distressed company would have a composite of the actual net position. I raise this issue because I concur with the point made by the previous speaker that media reports and information provided by developers and individuals in the banks indicate that the holding of the loans in question is incredibly complicated. In particular, numbers of different companies and developers are involved in these loans, numbers of banks are party to the various transactions and cross-collateral is in place. It is essential, therefore, to have a consolidated statement on the principal developers and to identify at least 95% of the €120 billion gross amount. This should not be a problem, especially given that the Government eventually nationalised Anglo Irish Bank some months ago. As we have known for some time, Anglo Irish Bank accounts for possibly 25% to 30% of the total of distressed portfolios. Since the Government has taken command of Anglo Irish Bank, it will therefore have available to it the information I seek.
How much of the €120 billion and, specifically, the €90 billion is rolled-up interest? Will the Minister provide this figure when he produces the consolidated schedule of the consolidated values? We must remember — this was confirmed to the joint committee by Mr. O'Connor, the chairperson of Anglo Irish Bank — that it is the practice of Anglo Irish Bank and other banks to treat interest that has been rolled up as a fresh loan, as it were, and as a fresh amount of asset value in respect of the loan. Therefore, to make an assessment, Members of the Oireachtas will need to know the amount of rolled-up interest.
I am a little concerned that the Deputy mentioned €120 billion as the real figure. It is a notional valuation at the peak and is not something in the banks' books.
In his presentation to the committee the Minister mentioned 25:75 as being the real ratio.
It is.
I am taking what he has said at face value, that this is the way we are to approach it.
Indeed but for valuation purposes. I do not want to see——
We are trying to get to valuation purposes.
Correct.
If we are using the Minister's figures and the 25:75 ratio and let us say we have a developer with a loan of €90 million, the Minister is suggesting the capital value of the asset at the time the loan was taken out was €120 million. That developer has defaulted and perhaps owes the bank €3 million to €4 million in interest on the €90 million loan taken out. In the bank's books, that loan has gone up in value over a period of a year to two years to €93 million to €94 million.
I agree, except that very few loans will be given at their actual peak; therefore, loans for far less could have been advanced four years previously, the collateral secured by the loan would have gone up in value but have since gone down in value.
That brings us to another point. In section 58 the Minister adopts two values. He first adopts current market value. When Mr. Lundgren visited the committee — the Minister spoke approvingly of his presentation — he suggested strongly that in a crisis the only real guide was market value. In valuation market value includes an expectation of future conditions. It does not include an expectation of future conditions so far into the future that we would need a crystal ball to work them out. In the ordinary course of events market value includes the valuation of current expectations about the market into the foreseeable future. Alternatively, discounted values can be introduced to get us back to market value.
In that context, the Minister's second method of valuation — this is the great difficulty the Labour Party has with section 58 — refers to long-term economic value. I do not know what that is, but almost every taxpayer in the country and I fear that long-term economic value is a way of overstating the value of banks' loans, thereby overpaying the banks as a way of refloating them and getting their capital values back up again. The Minister refers to the long-term economic value being applied to an asset that can "reasonably be expected to attain in a stable financial system, when current crisis conditions are ameliorated and in which a future price or yield of the asset is consistent with reasonable expectations, having regard to the long-term historical average." What does this mean in practice? This is the core of the problem with section 58. It sounds like a phoney system——
The Deputy has spoken for 25 minutes. Perhaps she would cede to other members of the committee.
The Chairman asked me to ask questions.
That particular group of questions was like an opening statement.
Okay.
I can answer all of the questions asked in order that we will not have repetitive questions afterwards.
I want to know about the words "when current crisis conditions are ameliorated". What is the Minister's outlook in this regard? Will it be in five, seven, 12 or 20 years?
The Minister made several comments on the Labour Party position and the prospect of nationalisation. The Bill he has presented provides for the most extraordinary powers given to any Minister since the foundation of the State. I wrote an article for today's edition of the Irish Independent outlining the key sections of the Bill. Although it provides for an independent superstructure in NAMA, the legislation allows for the Minister to direct and issue instructions in respect of that entity’s operations. If NAMA as proposed is established, in effect the Minister for Finance will be the property tsar of one of the largest property companies in the world. Under the terms of the Bill, he will be empowered to wield extraordinary powers. For example, the section dealing with the valuation board allows for the Minister to overrule its recommendations.
Mr. Bo Lundgren told the committee that transparency was essential to the process of cleansing the banking system of toxic loans. However, the draft legislation allows the Minister to disclose or not disclose information as he sees fit. The Minister has indicated that NAMA will be accountable to the Comptroller and Auditor General and the Committee of Public Accounts. However, the small print of the Bill allows almost the entire range of information, other than summary information, on the operation of NAMA to be omitted from publication and any transparent oversight on the grounds of commercial confidentiality. The powers the Minister is taking to himself in the Bill are grossly excessive. I would go so far as to say, in the context of his comments on nationalisation, that I am not aware of any nationalised institution, at any time in the history of the State, where a Minister has had as much as power as will be bestowed upon the Minister for Finance in respect of NAMA. It is extraordinary.
It is difficult to understand what the beef is about nationalisation, given that the Minister has conceded that we are heading towards a situation where the State will, one way or another, ultimately take a majority stake in the banks. Moreover, the Bill provides the Minister and, therefore, the Department of Finance with extraordinary powers to direct every single action undertaken by NAMA. The reality is that we are dealing with a mess which no method will resolve without pain. Why is the Minister taking such extraordinary powers and why is there so little transparency? We must bear in mind that Mr. Lundgren emphasised the importance of two factors in any scheme to deal with toxic loans, namely, market value and transparency.
May I be allowed to make a brief response to the Minister and set out my party's position on the Government's proposals?
The Deputy may make a brief contribution.
In the past my Dáil party leader and I have been grateful to the Minister and his officials for the briefings they provided for us on relevant issues. I ask that they continue to do so in regard to these proposals.
We are all agreed that we must get the economy moving as quickly as possible. Sinn Féin's position is that this should be done with the least possible risk to taxpayers. NAMA removes all risk from the banks but does nothing for taxpayers other than heap huge risk upon their shoulders. The solution is to nationalise the banks, if only on a temporary basis. This would at least give the Government control of what is going on. The Minister's pointing to Anglo Irish Bank as an argument against nationalisation is a weak example. We are all aware that Anglo Irish Bank was a basket case which nobody would touch with a barge pole for 12 months before its nationalisation. It is possible to have a nationalised bank with a commercially focused objective.
I do not perceive major risks of political intervention in a nationalised bank given the right portfolio. I have some problems with some parts of the Bill. Section 64, which is followed by section 105, refers to the banks being required to function with good faith. I do not know whether this term is defined anywhere in legislation. Certainly, it is highly subjective and, given the banks' track record, expecting them to act in good faith with no punishment if they do not is highly dubious. Moreover, section 102, to which Deputy Bruton referred, allows the Minister to send back the valuation for a toxic loan to the independent panel if he or she believes it is too low, while at the same time there is no provision for dealing with overvalued loans by the so-called independent panel. Such a ministerial intervention is extremely worrying. In addition, the business of NAMA being in a position to offer loans to developers to complete unfinished developments and to compulsorily purchase land is extremely worrying as this constitutes a sweeping power and I do not know the reason NAMA would wish to do so. Incidentally, there is no indication as to the level of interest that NAMA would charge on any such loans it would offer. In a positive sense, the Minister stated he has not ruled out nationalisation and that it is not off the agenda but it still is a possibility. I ask the Minister to consider making such a move now rather than later to ensure we get there more quickly.
On the issue of the valuation of loans generally, long-term economic value is an extremely subjective term that is contrary to the position of the Government in the 12 years or so it has been in power. Some realism must be brought to bear in respect of the value of the loans. I also acknowledge the Minister's comment that he will consider briefing Opposition party spokespersons and leaders in this regard because in the past there never has been a breach of confidentiality on foot of those briefings that have occurred and doing so would be particularly useful.
This has been a constructive debate and I welcome the contributions made by all the Deputies opposite who spoke. There is a large number of questions and I will try to be as brief as possible because other members also wish to ask questions. First, I agree with Deputy Bruton and note that he has the sense that we are in a grave position. He outlined the whys and wherefores in this regard and his acceptance that we should do it. I also greatly welcome the fact that Deputy Bruton made it clear that Fine Gael does not subscribe to the proposition that there should be default, as well as his acceptance that the reference to senior debt was a simple and understandable error. I greatly welcome this and it is a highly constructive note on which to begin this debate. Moreover, as Deputy Bruton indicated, there is scope for aggressive commercial management of subordinated debt, which can and must be part of the solution. I have accepted that, as does he, which is highly positive. Even on that category of debt, aggressive commercial behaviour requires that as a small country we act in accordance with the norms, which are changing, that pertain around the world in the marketplaces.
In the middle of his interjection, Deputy Bruton raised a question that goes to the heart of the nationalisation issue that has been raised in this debate, namely, what if the shareholder value is wiped out as a result of the valuation process? While the legislation includes an evaluation process, I will be a little more concrete and specific about this question of nationalisation. There are only six guaranteed banks, five of which have been in intensive discussions with NAMA and my officials. Of those five, two are building societies and another, Anglo Irish Bank, is in full public ownership. Consequently, these abstract discussions about nationalisation pertain to two institutions, namely, AIB and Bank of Ireland. These are the two institutions to which we refer. It would help this debate somewhat if commentators were honest and admitted that these are the institutions whose nationalisation they advocate and not some other mysterious entities which do not exist with regard to NAMA.
Let us consider these two institutions in the context of what Deputy Bruton proposed. Why would I outline the fact that there may be a residual or substantial shareholder interest left in these institutions if valuations established that their entire shareholder value was wiped out? The reason is on the basis of the information that I have at my disposal. This is not information that only I have at my disposal because markets have assessed that information in the context of their current share prices and rating agencies have used it in their assessment of these institutions. Were these institutions in the condition which Deputy Bruton suggests they would not have these positive market ratings and they would not have the degree of shareholder value they do. That is why in my public statements I do not envisage a complete wipeout of all shareholder interests in those——
What valuation of the loan book transferred to NAMA underpins those views?
Bear with me for a moment. With regard to those two institutions, the current market assessment is based on their entire balance sheets which include the assets to be transferred to NAMA. Even on that basis the current market analysis is that they are viable trading entities based on their share price and rating assessments. That is why I speak as I do. I have to maintain confidence in a system in which world markets have confidence. When one speaks of the total wipeout of shareholder value it is unlikely to materialise on the basis of the information I have to hand and that will be the basis of my estimates in the middle of September. It should be remembered that to protect the taxpayer one must have a detailed statutory valuation of each loan for the purposes of this exercise. If there are matters which these institutions have concealed from the markets, rating agencies and the detailed stress testing in which PricewaterhouseCoopers, my Department and the NTMA have engaged over the past year, which successfully evaded capture from all this analysis and which emerge in the statutory valuation, then they would have an effect and an impact on the valuation of these banks.
The Minister stated the figure is €90 billion. Will he give the committee a breakdown of that figure?
What I said in my budget speech was a figure of €80 billion to €90 billion.
If we take Anglo Irish Bank out of it how much does that leave for the two other banks?
Does Deputy Burton want a breakdown of the book value of each institution?
Yes, that is essential.
That will be done when I introduce the legislation in Dáil Éireann.
The Minister must have a ball park figure in his head at present.
We have received much information from the banks and we are finalising the figures. Deputy Burton will appreciate it is significant information which I will announce in the House on 16 September. The book value that applies to each institution which indicated an interest in participating in NAMA must be supplied before the House can fully consider the legislation on Second Stage. I accept that. Naturally I must be very careful in the compilation of that information and my officials, NAMA officials and those assisting them must be very careful to assess what the banks state about book value so we have a battened-down figure on 16 September. Even that figure will be an estimate because it will be further validated in the valuation process which must take place in a statutory way.
Will the Minister tell the committee how many developers and how many loans are involved?
I was going to return to that but the question raised by Deputy Bruton on why I appear to rule out 100% nationalisation is fundamental to our discussion this afternoon. I do so because the only two institutions we are discussing are Bank of Ireland and Allied Irish Banks and no information has been brought to my attention which suggests that is the position in which they find themselves.
From our point of view, the haircut is absolutely central to what value is put on the residual banks.
I accept that.
We are discussing it circularly.
It is but the fact remains that looking at them as they stand and forgetting about NAMA altogether, the judgment of the marketplace on these two banks is that they are survivable entities. They can continue to work——
The market has not made a judgment in the absence of NAMA but it has made a judgment in the presence of the NAMA legislation on the books. The figures will reveal all but clearly the write-down the Minister will impose on those loans has an absolutely central value to the shareholder capital that is left.
We have to be——
Both the High Court and the Supreme Court expressed viewpoints about values with regard to a very prominent portfolio of loans and interests. This indicates that the judges of the Supreme Court and the judge in the High Court put very little merit on the long-term value of these loans. Has the Minister taken that into account or will NAMA sail on regardless of what the Supreme Court has to say?
We accept absolutely the judgments of the Supreme Court. The judgment of that court was very welcome in the context of progressing NAMA. Of course we have regard to the expressions of the judges in this matter.
I will deal with the question on hand because it is fundamental. As Minister for Finance, I expressed my opinion in the public domain that I do not believe these banks will be entirely wiped out on the basis of their current losses. This brings us back to some of the figures given in the public debate since the publication of the draft Bill. One commentator suggested, for example, without any evidential basis, that the appropriate price for these assets was somewhere between €30 billion and €35 billion. Another publication suggested the figure should be €27 billion. The amount of the losses required to bring the banking system down to this level is considerably in excess of the figure given by the IMF as its estimate of the losses in the Irish banking system. That IMF figure was prepared on the basis of a far more professional analysis than that engaged in by either of those commentators in their publications. If the banking system were to have losses on that scale, I would agree with the Members opposite that the banking system would then be a substantial systemic threat to the economy of this country. Its own fragility would be a threat to its survivability as a banking system.
When one is talking about valuations one must have regard to some basic factual matters. Both commentaries which referred to those figures would imply that Allied Irish Banks and Bank of Ireland are insolvent. That is not the case, neither from information at my disposal nor from that at the disposal of any of the statutory authorities which have responsibility for these institutions. I assure Members that whatever about the failings of the past, those institutions are more than zealous in vetting these matters now. This suggestion does not have a foundation in any market perceptions. We know that markets maintain a very intense surveillance of financial institutions, through ratings agencies, stock exchange movements and the detailed analysis in which investment houses engage, day in, day out, in financial institutions.
To suggest the shareholders' values will be entirely wiped out or that the losses are of the scale mentioned in some publications, is to suggest or allege banking and national involvency. That is not in accordance with the case regarding the two institutions which it has been proposed to nationalise. That issue is fundamental in this debate. As Members of the Oireachtas we can speculate about valuations or we can work on a procedure that will ensure we have the correct valuations. I suggest we would be much better off devoting our energies to that rather than postulating figures and advancing them, as has happened in the debate to date.
With regard to Deputy Burton's point about the High Court litigation which took place and established that particular assets in the case in question were distressed, that is the case. However, we are buying loans, some of which are performing, some non-performing. We must evaluate those loans and that is the primary exercise. In addition, we must ensure the collateral or security for those loans is such that there will also be a basic buffer of protection for the taxpayer. That all comes into the valuation exercise. I do not want to take up the time of the committee but——
On that critical point, is the Minister suggesting that he is going with a €120 billion book value relative to the €90 billion or is he taking current market values, relative to both the developers' accounts and the current value of their loans and accounts? What he is suggesting leaves the way open to a very significant inflation of values. It is a point the Minister must answer both in general terms and by producing a consolidated statement relating to the developers who comprise the sick list the taxpayer must rescue. It must be a consolidated statement that irons out all the——
Who exactly has the taxpayer to rescue?
The taxpayer is rescuing the banks and if the banks are rescued, many of the developers hope that NAMA will refloat their boats.
I have made it clear, and I am glad to have the opportunity to reiterate, that one of the reasons the extensive powers which the Deputy complained of earlier are vested in the Minister is to prevent developers who have defaulted from re-entering the construction and development market. That is one of the reasons I have taken these drastic powers in the legislation. Either I as Minister for Finance or my successors will be able to restrict that type of activity. There is no question of it arising.
That is not stated in the Bill. There is not even a comprehensive definition of assets or a requirement to register the assets in the Bill.
We can return to that on Committee Stage. The fundamental point and stated intention is that those who caused this problem and who fail to meet their obligations to NAMA will not be able to return to or re-enter this business. That is very important.
Can the Minister explain how that can happen?
We are dealing with a tranche of questions.
I will not have any foundation laid here this afternoon for the suggestion that this is a bailout for developers. It is not.
Can the Minister explain how that might happen? If one has a limited company that goes into liquidation, can one not start up again?
Appropriate guidelines can be devised——
No Minister for Finance can prevent a person going back into business. That is a ridiculous statement, with respect.
They cannot be prevented from returning to business, but they can be prevented from returning to a business with the assistance of NAMA where they previously defaulted to NAMA.
How would they return to business? They would re-buy their distressed assets at lower values. Is that what the Minister is suggesting?
Deputy Burton has raised questions that can be discussed in detail on Committee Stage of the Bill.
We are all ears for the answers.
I am trying to get through Deputy Bruton's 14 questions first. Then I will deal with the questions Deputy Burton raised.
With regard to the concerns expressed about the dangers of political involvement in NAMA, I agree it is something we must examine very carefully in the analysis of the legislation. Regarding the cost to the taxpayer, I indicated an estimate will be provided on 16 September. That estimate will be backed up with information on how it was arrived at. With regard to the valuation procedure, it must be independent and transparent. The reason the Minister has been given a role in this is to ensure the full protection of the taxpayer and to ensure that if the Minister is of the view that the valuations are excessive, he or she can have them reconsidered. That is important from the point of view of the protection of the taxpayer.
Where is that in the legislation?
In section 100.
That is only in the event the banks challenge it as being under value. I cannot see in the legislation where the Minister can challenge a simple decision to over-value by NAMA.
I can give directions to NAMA to have a valuation reconsidered.
The Minister can give directions in either direction, up and down. That is the power in the legislation. Having appointed an independent valuation board, the Minister can order it to adopt his valuation and he does not have to show cause.
Woe betide a Minister for Finance who appealed a favourable valuation. Again, we can examine this on Committee Stage.
We will not know about it because it is all secret.
No, that matter is in the public domain in the context of the reporting mechanisms.
It is important we work on the detail of this legislation, improve it and promote public confidence in what is being done. It is not a good presumption of statutory interpretation to start with the worst case scenario and work back. One must see how the legislation can be strengthened, and it will be strengthened.
It is the Minister who indicated that our protection against over-valuation is a ministerial directive. We did not say that.
I am saying it is in the legislation and the Deputy does not appear to accept that.
I accept it is there but it is strange that we will depend on an individual ministerial direction for the general protection of the taxpayer in this area. We expect that an independent audit of a valuation process by a body such as the Office of the Comptroller and Auditor General would provide independent protection rather than relying on Ministers issuing directives.
That is there as well.
It is not.
It is not. The Comptroller and Auditor General can audit the body but that is after the year end. The horses well and truly will have bolted by then.
The Deputy wants a designated person other than the Minister to protect the interests of the taxpayer.
That is what I want.
The presumption in this is that the Minister will not do so. I am accountable to the House.
I cannot think of other legislation that relies on ministerial directions to provide such independent validation of a process to protect the taxpayer. It is unusual to expect individual ministerial direction.
Why set up NAMA if the Minister can issue all the directives?
It is a day-to-day operation.
The EU directive will require us to conduct random audits of these valuations. There is a presumption in this line of questions that I do not like, which is that the Minister somehow will be remiss in protecting the taxpayer.
It would be strange to rely on ministerial——
If the Deputy wants to structure further intensive review of how the Minister exercises those powers, I have no difficulty in entertaining amendments in that regard and that can all be examined during the passage of the legislation.
I would like to deal with the issues of principle raised by both Opposition spokespersons as we descend into the detail. Fundamental issues were raised in both contributions and I would like to deal with them. The question of the adjustment factors was raised. They will be spelled out in the regulations, which will be published at the time of the Second Stage debate.
Will the Minister expand on that because it is central to the valuations? Will he go through that slowly?
We will return to valuations later. The adjustment factors will be published in regulations when the Bill is introduced in the House. Work is ongoing on the regulations.
With regard to the question of shareholder value in Allied Irish Banks and Bank of Ireland, I have dealt with the fundamental assumptions. The fundamental assumption here appears to be the suggestion that I should, as a matter of policy, accept that these institutions are insolvent, although the markets, rating agencies and the information available to me does not accept that.
The issue of the long-term economic value was raised, naturally and correctly, in both contributions. Essentially, there has been a move away from marking to market because policymakers have concluded it is stupid to use prices when markets are illiquid. By calculating the long-term economic value in an extremely illiquid market, one is giving an appropriate valuation to the assets concerned.
Will the Minister explain what that means in plain English? I do not understand what "appropriate valuation" means. I understand what "market value" means.
Can I explain in plain English that the accounting standards that now apply to the United States are the same as those that apply to the valuation of assets under this Bill? Is that plain enough for the Deputy?
No, it is not.
Will the Minister and the Deputy please deal with the subject matter?
I refer to paragraph 5.5(40) of the EU's document on the treatment of impaired assets in the Community banking sector, which states:
As a second stage, the value attributed to impaired assets in the context of an asset relief program (the 'transfer value') will inevitably be above current market prices in order to achieve the relief effect. To ensure consistency in the assessment of the compatibility of aid, the Commission would consider a transfer value reflecting the underlying long-term economic value (the 'real economic value') of the assets, on the basis of underlying cash flows and broader time horizons, an acceptable benchmark.... assets, the nature and origin of the problems of the beneficiary bank; and the soundness of the bank's business model and investment strategy.
The Commission is allowing governments to pay above market value to assist banks. Why should the Irish taxpayer pay way above market value? If we are to pay above market value, how much above market value does the Minister believe we should pay? That is the core issue. In section 58 of the NAMA Bill, the Minister has set out two methods of valuation — market value, which most people understand, and long-term economic value, which relates to crisis conditions. We do not know whether those conditions will last five, seven, ten or 15 years. The European Union permits a whole range of valuations, as the Minister said. It seems the Irish taxpayer is to be asked to pay above the odds in the valuations. That is the net question.
The Deputy used the expression "way over the odds".
That is what the Minister read out from the Commission.
The Commission did not say "way over the odds". The Commission polices these arrangements. Anything we propose will have to be approved by the Commission. That is the point. The implications of the formula will have to be approved by the Commission. The formula has been used by other states that are dealing with similar problems. As I have already explained, the accountancy treatment in the United States is similar to what is proposed here. The actual assets on the books of the banks in the United States are valued in the same way — or in a similar way — as the statutory formula which is proposed here.
In the US, a transparent system of stress testing was published in detail on-line. The overseer of banking in the US — she is an independent academic — reports regularly to both houses of the United States Congress. We do not have anything like that in this jurisdiction.
We have had a year of stress testing of the financial institutions.
No detailed information has been published. The Minister will recall he did not get around to reading the report in full.
We have published——
I would like some of the other members of the committee to be given an opportunity to ask some questions.
I will not go into the details of the Fine Gael proposal, other than to mention that it involves putting €2 billion of core tier 1 capital into the bank. It believes it will generate lending of €40 billion on that basis. That lending will have to be backed by deposits, which will have to be taken from other Irish institutions; or by funding, which will have to be attracted from international institutions. Fine Gael seems to assume that money is available within the European Central Bank to fund this operation. The reality, as Dr. Garret FitzGerald pointed out in a newspaper article on Saturday, is that while Ireland has 3% of the value of the eurozone, it already has 9% of the collateral provision that the European Central Bank can provide in the existing banking system. The European Central Bank has been enormously supportive of the Irish banking system. In order to obtain funding from the European Central Bank, however, one must be in a position to pledge assets with the bank. Home loans and home mortgages are the most favoured form of asset.
As Deputy Bruton pointed out, there has been some relaxation in relation to loans to business. However, it is not as extensive as the type of collateralisation that is possible with home loans. A huge pot of money is not available from the European Central Bank for immediate collateralisation to set up this bank — to recruit staff, give loans and attract deposits and funding from other sources. If one had assets that were eligible for support from the European Central Bank, they would be subject to a substantial discount in relation to the amount of money one could actually obtain for them. One has to have advanced one's loans before one can obtain the collateral. The establishment of a bank of that type — one that would actually help the credit crisis in the community over the next year — would be a very difficult operation. I suggest that the year will be out before such a bank is up and running. The problems of the other banks will remain to be dealt with at that stage.
Let us be candid about it — we have to come back again to the problems of Bank of Ireland and Allied Irish Banks. Although extensive stress-testing has already been done on these institutions, Fine Gael has suggested that a further year should be spent stress-testing them before a decision is made on whether a legacy bank and a new bank should be created at the end of that year on foot of the amount of impairment on their assets. If we go down that route, it is inevitable that we will have to look at how all of this can be funded. It will cost money. Given the volume of subordinated debt already culled by the two institutions in question, it is unlikely they will have much subordinated debt left to be culled and used to fund the Fine Gael Party's legacy bank.
Major constitutional questions arise about whether shareholders in the two banks in question can be told they no longer own a share in the bank and may only own a share in the proposed bad bank — in effect, the Fine Gael Party's legacy bank. To do so would, I believe, be constitutionally almost impossible without a large degree of compensation to the shareholder, which would completely defeat the purpose of the exercise. In addition, while I appreciate very much Deputy Bruton's statement that there is no question of default, there is great funding uncertainty about the good bank from September 2010, the point at which Deputy Bruton indicated the guarantee would be removed. If, at that time, the patient could not survive without life support, the patient would die. That is not a viable banking strategy for the year ahead, nor has it been costed.
I do not wish to be contentious about the issue. I would prefer if Deputy Bruton met our advisers and worked through the implications to ascertain whether positive aspects of what the Fine Gael Party is proposing could be incorporated in any proposal. While I would have no objection or difficulty with that option, major theoretical problems arise with regard to what the Fine Gael Party has proposed to date.
This reminds me of Mark Antony's famous statement, "I come to bury Caesar, not to praise him." The truth is that the Minister——
Other members are offering.
——has tried to offer obstacles, whether constitutional or related to the European Central Bank.
I call Deputy Michael Moynihan.
He then indicated he wanted my party to discuss the matter with his experts. He is transparently trying to create a straw man which he could proceed to knock down. I will not disrupt the hearing but people should see what the Minister has done for what it is. He created a straw man and then proceeded to assassinate it. I will not engage further on this issue or delay proceedings.
I have received a formal opinion from the European Central Bank on NAMA. It points out that participation in the NAMA scheme is voluntary and that the eligibility criteria are carefully crafted. It states the draft law contains the necessary degree of flexibility to allow assets to be expanded. The opinion refers to the preference in the draft law for the long-term economic value of assets rather than their current market value and states this requires careful consideration. It states it should be ensured the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side in regard to the use of the scheme. It states further the ECB considers that a guiding principle for the scheme should be that there is an adequate degree of risk sharing to limit the cost to the Government, provide the right incentives and maintain a level playing field for the participating institutions.
These matters are not included in the Bill.
We are here to discuss the issue. Sixth, the ECB——
The Minister should stop reading.
May I finish? The Fine Gael Party has not tabled amendments. The opinion further states the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be——
Did the ECB not also state it favoured market value? Will the Minister publish the document?
Please allow the Minister to conclude.
The document has been talked about freely in the Central Bank for some time. Why does the Minister not publish it? He has produced it like a rabbit from a hat.
It is being published this afternoon. I am trying to help the joint committee.
It has been available in the Central Bank and around town for some time. It is positively in favour of market value.
The Deputy interrupted me when I referred to nationalisation.
Does it favour market value?
No, it does not.
Yes, it does.
The opinion states that if the NAMA scheme is successful in this respect, this strategy should help to avoid in the short term the high costs involved in nationalisations and in the medium term the risk of banks' objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field. That is the opinion expressed on nationalisation.
Will the Minister read the ECB's recommendations on valuation?
I call Deputy Michael McGrath who will be followed by Senator Quinn and Deputy Fahey.
Will the Minister read the relevant part of the document and provide members with a copy? One of his large number of officials could leave the meeting and photocopy it.
I call Deputy McGrath.
The Minister has introduced a document which has been available to the Central Bank for some time but is not available to the joint committee.
It has not been available to the Central Bank or my Department.
It has been talked about around town and all sorts of people know about it.
It was made available to my Department this afternoon.
In that case, the level of communication between the Department and the Central Bank leaves much to be desired.
I ask Deputy Burton to allow other members to make a contribution.
I welcome the Minister and thank him for his constructive engagement thus far. The primary purpose of the NAMA project is to restore the banking system to a degree of normality. Clearly, the NAMA project has the potential to inject a huge amount of liquidity into the banking system, and that once loans are transferred from the banks to NAMA, this will result in the payment of around €50 billion to €60 billion in bonds, which will be in cash via the ECB, and will clearly result in a huge improvement in liquidity. What assurances do we have that such liquidity improvements will work their way down to the level of the small and medium businesses that are currently struggling in Ireland? What guarantees do we have that such liquidity will relax the brakes that are currently on lending and that are strangling small businesses and making it more difficult for personal customers to secure mortgages for first-time buyers?
Valuation has dominated the discussion so far today, and has dominated public debate in the last few months. The concern that many people have is with who is qualified to look into a crystal ball and to predict Irish property prices in five or ten years' time. That is a legitimate fear and is probably fuelled by the report a few weeks ago that a Canadian bank had expressed an interest in securing a stake in AIB after NAMA had transferred the loans from the banks to itself. Many people would have taken the view that a commercial bank is identifying an opportunity to secure a good deal, after the taxpayer has taken the risk out of AIB. That is an issue that we need to confront, as the Minister has done today.
The level of valuation will determine the level of write off that the banks must encounter on their books. The valuation will clearly have a significant impact on the equity capital base of the banks. There is a suspicion among some that the valuation can be somehow managed so as to minimise any further level of State injection of capital in the banks. If it is inevitable that there will be a further need for State injection of capital in the banks, and the Minister has confirmed that this would be by way of equity capital if it were to be done, then is it not better to consider doing it up-front before the transfer of loans to NAMA? It would enhance the integrity of the whole valuation process, because it would remove the suspicion that assets are being valued to minimise any further State recapitalisation of the banks. Rather than having to inject further capital as a consequence of the valuation methodology we adopt, would it not make more sense to do it in advance? This would also reduce the downside risk of getting the valuation wrong.
I suggest that the Minister should consider acquiring equity capital in the two main banks, so that they would remain floated and we would maintain the market presence. That might be where we ultimately end up anyway, but we would maintain the market presence and take a majority public ownership in terms of equity capital. By doing it this way, the taxpayer would benefit from any upside at the conclusion of the NAMA process, or even before that, because the banks would have been cleaned up and the taxpayer will have an asset which can subsequently be disposed of.
If we wait until the valuation process has been completed and the loans are transferred from the banks to NAMA, how long will we be waiting before there is a definitive assessment on whether further equity capital must be injected into the banks? In such a scenario, we would be allowing the banking system to be distressed for a longer period of time than is necessary. These are the types of questions we must ask. The Minister and his officials have clearly been crunching the numbers in some detail in recent weeks and the details will be communicated to us on 16 September. If a detailed analysis of the balance sheets of the main banks and the level of impairment with which they are faced indicates that a further injection of State capital is inevitable by way of equity capital, will the Minister consider doing so in advance? If not, when will we know whether such further equity injection will be required? If it is necessary, it should be done sooner rather than later so that the banking system is not left in a distressed state for longer than is necessary.
We will be in a position by 16 September to provide an estimate, on the basis of which the markets will read through the institutions the necessary investments that may be required. There is no question of any further capital which the State may have to invest being invested after the valuations. In all probability, the processes will take place contemporaneously. However, it is not something that can be prejudged. The crucial issue is that one cannot fix the valuations to prejudge the result. The valuations must determine the capital structure, not the other way around. One cannot factor into the valuation process a prejudgment about what the capital structure of the institutions should be.
I understand that. My point is that at this stage, the Minister should have a good idea of the impact of the valuations on the capital bases of the two principal banks.
We will have an estimate by 16 September, which may or may not have an implication for particular institutions. If it does, so be it. The exact quantum will then have to be worked out with the valuations. The markets will read very quickly, from the amount of the bonds the State proposes to issue, the implications for particular institutions, not all of which are the same. It is not axiomatic what size of stake one should take because it turns on the question of the losses. I have made clear that we cannot rule out, for example, a State majority shareholding if that is what the valuations point to. Equally, the valuations could point to a State majority shareholding in two institutions and not in another. There is a range of implications in the valuations. If we adhere to the proposition that the banks have a value, then clearly we must respect the principle that if there is still a value in the bank, there is still a shareholder in the bank. However, if one's policy on nationalisation is that the banks have no value, then clearly one should pre-emptively nationalise the institutions now. There is no evidence that this is the position, as I pointed out earlier in reply to Deputy Bruton.
Will the Government be positioned by 16 September to do whatever is required to ensure the capital ratios in the banks are maintained?
Yes, but the capital ratios in the two main banks, for instance, are currently more than adequate. That is not an issue. A crucial point which members must understand is that NAMA results in an acceleration of losses to the banks. Were the latter not to participate in this process, they could attempt to work out their losses over time. There is no suggestion at present that their capital ratios are inadequate. However, those ratios could be affected by an announcement that in the course of the coming years these valuations will inflict substantial losses on the banks. That is the crucial point.
Members of the public are entitled to ask why do we not let the banks work out their losses over time. The reason is what while a particular institution could survive as a private entity and protect its shareholders, the effect of all of this would be to inflict huge damage on the wider economy. The institution could hoard its capital to deal with its losses and protect its shareholders but inflict an amount of damage on the broader economy through the non-supply of credit. That is precisely what happened in the Japanese economy whose zombie banks were referred to by Deputy Burton. They never established something like NAMA and never prepared to face their losses up-front and deal with them. They insisted on and persisted in putting capital injections into their banks over a long period. For example, were we to nationalise all the banks tomorrow morning, we would be obliged to make those injections over time. Consequently, the key issue is how one compels the banks to take their losses up-front to cleanse them for the wider economy. This is what the NAMA proposal is all about.
If one wishes to supply credit for the wider economy, one comes back to the question of the valuations of the bonds that will issue to the banks in respect of whatever value is placed on these assets. I am stating that while something will be allowed on a hold-for-maturity basis, it will not be a wild over-payment but will be a realistic assessment of what allowances can be made in an illiquid market for an appreciation in the value of the assets over the medium term for which NAMA will hold the aforementioned assets. That is the principle and I do not have a difficulty in talking to members opposite about how that principle can be refined or adapted. As I stated, indicative figures will be provided on 16 September, which will translate that principle in both its current market value aspect and in respect of whatever allowance is made for holding to maturity. In general terms, these figures will be provided and all these issues can be assessed. The figures will only be estimates because thereafter the evaluation procedure must be transparent and independent, must safeguard the taxpayer and must produce final results. That is the position in this regard.
Inasmuch as I have been asked to, I wish to declare my interests. My declaration of interests has been published and to the best of my knowledge I do not hold any bank shares at this stage. I have been impressed that the Minister has come before the joint committee, answered questions and clarified matters. As far as I can gather, everyone present is anxious to support the solution and if that solution is NAMA, the Minister is providing members with the opportunity to have an input into it. I have four questions to which I would welcome responses. Members have been told that when developers went to the bank for a loan, in most cases the latter put up 75%. If such loans were made five years ago, I suspect that in most cases the developer did not get around to paying any interest and that such interest was rolled over for the entire five-year period. While this matter was discussed previously, how soon will NAMA know the extent to which this rolled-up interest has changed the figure from 75% to something that may be much greater? While I assume this will not be known immediately, one may know what the figure is by the time one gets into all five institutions.
The second point pertains to an article I read in last Thursday's edition of The Irish Times concerning foreign banks which believe it will be impossible for them to trade here. Rabobank was one such bank that made this point. Its chief financial officer stated: “it is not really possible for non-Irish banks to compete on that market any more”. As for the five institutions that are to be designated, can other banks or financial institutions that are not so designated apply and, if they do so, will they be accepted? Otherwise, might the Minister accept more than the existing five institutions and will institutions such as, for example, Ulster Bank be allowed to be included in this regard?
My third question pertains to property values and how one goes about taking them. On that basis, while one must take a long-term view of perhaps ten to 15 years, rather than a short-term view, if I understand correctly, we will pay up-front. It has been suggested that we should consider either staggering that payment or making it in different stages by splitting it, instead of making it all at one time. I acknowledge it is being done on the basis of bonds which can be cashed. However, given that the Minister referred to a sum of approximately €60 billion, could this be divided into payments of €30 billion now and €30 billion at a later stage when more is known about what is happening? I refer to another point that was made earlier, namely, the large amount of power that will be given to the Minister in this case. While it will not necessarily be the present Minister, in future years the Minister for Finance will have a great deal of power to interfere or, as someone suggested, meddle in the work of NAMA. I believe there is a need for an outside democratic intervention albeit not necessarily a watchdog. Might the Minister recognise the need for some oversight in this regard, perhaps by an Oireachtas committee? I am concerned about the power a future Minister will have. I know from experience that on occasion State bodies have not been allowed to operate correctly. The Minister explained why he believes there is a need for the power and I recognise that power should be maintained in some form or other. I suggest it could be much more democratically exercised through an arrangement whereby an Oireachtas joint committee would be able to oversee it. I am not sure about the efficiency of that or how it would work but I suggest it might ease the concerns of some that a future Minister will interfere too much in the operations of NAMA, which we hope will succeed in its objectives.
Senator Quinn has posed very interesting questions. With regard to non-guaranteed banks, any bank can apply. Senator Quinn mentioned Ulster Bank and the same applies to HBOS. Neither of these institutions applied to be guaranteed by the Irish Government although they were free to do so, as were a number of other foreign and externally owned institutions. We have not had the opportunity to do the type of due diligence, analysis and stress testing on these institutions that we did on the guaranteed banks. In the weeks leading up to the guarantee being agreed by the Houses we had commenced that process in some institutions and we continued that process of intensive digging. We would have to start that process and those institutions would have to have a substantial record in that regard before we could consider them because, as we all agree, the protection of the taxpayer is paramount.
There is a point of equity in this as our protection and operation extends to subsidiaries of the Irish banks in the United Kingdom or other jurisdictions since approximately one third of the assets captured by NAMA are external and not in the State. A substantial amount of bank assets in the United Kingdom are covered by our operation. The UK legislation was drafted in such as way that there must be a minimum of £25 billion on a balance sheet before one can apply for it. None of the Irish institutions guaranteed by us meets that requirement in the United Kingdom.
I am not ruling out any application in advance. We will consider applications and we will have a set of statutory criteria with which to assess them. If we were to admit UK financial institutions, the practical conclusion would be that the Irish Government through NAMA would be providing cover for the entirety of the banking sector in Ireland and a substantial proportion of the banking system in the United Kingdom. The United Kingdom has adopted a risk insurance scheme which is not available to the Irish banks based in the United Kingdom. A practical inequity would flow from pursuing the policy which Senator Quinn is following. The question of whether they are put at a disadvantage on the playing field can be reviewed but the United Kingdom legislation envisages that those banks will benefit from the United Kingdom scheme. A scheme has been drawn up for them in the parent country of the banks. One must then compare the British and Irish schemes.
We have to take into account property values and the risks associated with them. Senator Quinn mentioned the possibility of having a wider spectrum of valuation or devising a mechanism into which that could be factored. That is something under examination by the Government. As I stated, it was being examined before the Bill was published. We did not include an express provision in the Bill in that regard because our work on it was ongoing and the Bill was published for consultation purposes.
With regard to the question on a watchdog, I am very open on this. The Bill provides for an Oireachtas committee. I hesitate to use the words "Oireachtas commission" but there could be a commission made up of Members who would have a role that was not executive but still parliamentary — a more intensive level of accountability and a capacity to share confidential information.
In one of the debates on banking, Deputy Burton mentioned that one of the difficulties is that so much information is not in the public domain. I agree this is a very big problem in terms of building public confidence. However, one cannot put certain information into the public domain. For example, this afternoon Deputy Burton mentioned that lists of developers should be published. The reality is that a developer who is in a customer relationship with a bank has confidentiality assured. If there is a default, that person comes into the public domain because it is reported in the courts that he or she has defaulted and that enforcement proceedings may be taken. There are many aspects of enforcement procedures which bring the identity of the defaulter to light. In recent media publications such have been disclosed, even in the case of private householders. I cannot depart from that rule which applies in every country in the world. Banks do not talk about their customers in public. That rule is universal in scope. The idea proposed is that the NAMA can come out and state the names of all the developers on its books, what they owe and what lands they have. That information is not provided anywhere in the world. If it were the case that it was to be disclosed in Ireland, for example, that would cause an immediate and shattering loss of confidence in the entire banking system because we would be departing from the norms that apply in every other country in the world.
There is a need, therefore, for us to look at the control mechanism. Simply having an Oireachtas committee, with public sessions and discussion of banking matters, will not generate the kind of confidence needed because NAMA will not be able to disclose all the information people may require to be persuaded. We need to examine this issue and how we can create that security and degree of confidence in an institution by means of appropriate Oireachtas oversight. Such oversight might also include oversight of the far-reaching ministerial powers to which Senator Quinn referred. I am very open on all those issues and I certainly do not wish to pre-empt what the Oireachtas may wish in that regard. I am open to any constructive suggestions.
I wish to make a point with regard to the question about the impact of rolled-over interest on loan to value. I appreciate I made this point earlier to Deputy Burton. The 25% loan to value is an entirely notional valuation exercise at the peak of the market. Many loans were taken out long before the market reached that peak and, unfortunately, some were taken out afterwards. It is therefore an entirely notional figure and I do not want to see headlines stating that I am now handing out €120 billion while what I have told the committee this afternoon is that we are not at €90 billion in terms of book value and that a substantial discount will apply to that. I shall ask Mr. McDonagh to deal with the impact rolled-over interest has in this matter.
Mr. Brendan McDonagh
On a previous occasion I stated to this committee that it is clear that interest roll-up has taken place. It is allowable under the accounting rules the banks have followed and their auditors have signed off on their accounts. It was asked how long it would take us to establish this. As part of the due diligence process we are going to value each loan individually, see what it started out at and what interest roll-up there is on it. Fundamentally, that will not make much difference to the process because what we will be examining is the value of the underlying collateral as of now. We will be seeing that and raising it to the value of the loan put forward by the bank. If in certain cases that balance includes rolled-up interest, that will establish a loan to value ratio between the current value and the actual loan at the time. Sometimes this has been misunderstood to mean that we are starting at the top of the loan and working down, whereas we are starting at the bottom, calculating the value of the collateral now and working up. We have put this forward to the European Commission as a mechanism. It is examining it at present and to date has not raised any objection. Informally, the Commission has stated that this is the right way to go about it.
With regard to declarations of interest, I confirm that I do not own any bank shares and that my shareholding in property has been declared in my declaration of interests and will not be of any interest to NAMA.
I congratulate the Minister on the comprehensive outline he has given of the proposal. Once again, the question has been asked today about how much taxpayers will be asked to pay. Will the Minister clarify in simple language what the arrangement will be regarding the Government bonds which will be backed by the ECB, what the borrowing rate for these bonds will be, how the interest on these bonds will be paid by the Government and how the bonds will eventually be paid back? Will he also clarify a little further what he said regarding the capitalisation investment already made? He spoke about an 8% yield from the preference shares in Bank of Ireland and AIB and the warrant for a 25% shareholding which is held. At what price was that warrant purchased? In the event of further capitalisation, the Minister has stated publicly that it will be done through an investment in return for ordinary shares. Exactly what type of return can the taxpayer expect from that investment? I am trying to establish that this is an investment by the State rather than the misinformed view expressed by some commentators that the taxpayer is giving money to the banks.
Will the Minister further confirm, with regard to developers who find their assets taken over by NAMA and who are insolvent and not in a position to pay their interest, that these developers will be liquidated in the same way companies are liquidated? In other words, the first people who will take a hit when NAMA is up and running will be the developers if they are insolvent and cannot pay their interest. That must be clarified.
Most importantly, it was interesting to hear the Minister's comments about valuations and their implications, particularly his comments about the estimate of further capitalisation that will be forthcoming in a fortnight. Clearly, getting the valuations right is key to this issue. Will the Minister explain further the way each loan will be independently valued? He says the expert who is accompanying him, Mr. John Mulcahy, has extensive experience in the property business. Clearly, Mr. Mulcahy will be the key figure in this exercise. Will he outline what expertise he has for doing this most difficult and important job for the future of the country? What is his assessment of the recent property bubble in Ireland? Did he get it right when everybody else got it wrong? If he did, it would certainly give us confidence.
Will Mr. Mulcahy outline what the impact will be of the 30% of the banks' loan book which will be transferred to NAMA being held overseas? Is that good? Is it likely that we will see, for example, the Anglo Irish Bank portfolio in the United States produce some good results? What is the impact of property in London? How has he valued and what exercise has been undertaken with regard to property overseas?
Deputy Bruton referred to NAMA-land. Will Mr. Mulcahy confirm that land located in county towns which, as the Deputy said, does not have the potential to generate an immediate return will be valued as agricultural land and that there will be significant losses to the investors in these lands where it is clear they have nothing more than agricultural value?
The assumption in the Deputy's question is correct in that taxpayers are not being asked to pay for the NAMA bonds because the Government will issue paper at 1.5% interest — this is the figure we anticipate — which can be presented by the banks on world markets or to the ECB. If the bank holds the bond, the State will have to pay interest at 1.5% which is a much lower rate than applies to our current borrowings.
We will underwrite it.
Can I finish my reply? Either the Deputy wants to understand this or he does not.
The Minister to continue without interruption please.
The point about paying off the bonds is the 1.5% coupon or rate of interest will be paid by NAMA through the income stream it will have on the acquisition of these loans. The estimates are based on this; therefore, taxpayers will not be directly involved in paying the interest.
They will underwrite it. That is all I said.
Yes, the sovereign is underwriting it. I accept that and because the sovereign is underwriting, it could have an effect on our spreads, although as the Deputy has seen, the mooting of the NAMA proposal has had a positive and beneficial effect on the rates of interest we must pay on our borrowings, which is crucial and central to our survival. To date, the NAMA proposal has had a positive impact on these spreads and the rates of interest we must pay for our borrowings. The discussion here is important in that context in giving the public local confidence to supplement the international confidence in this operation. That is the position regarding the taxpayer.
Deputy Fahey also referred to the question of the 8% interest we obtain from the existing investment in Bank of Ireland and Allied Irish Banks and the 25% effective economic stake we have taken in them. The warrants and the stake have increased dramatically in value because they were acquired by the State when the shareholding in these institutions was in a low position. I can supply the data. Less than 60 cent was the figure at which it was fixed. There is a formula in the warrant agreement adjusting the amount over a period of time. It is fixed on a number of days, not just one. In other words, we hold the shares to maturity over a period of time and fix in the middle as being appropriate, rather like the valuation arrangement. That is how the warrants were valued.
With regard to insolvent developers——
Why then is the Minister opting for ordinary shares if he is going to further recapitalise?
Because preference shares do not qualify in all respects as core tier 1 capital for a financial institution. This particular investment which guaranteed the State a return was sufficient to generate confidence in these two institutions at that time but were substantial losses to be accelerated by NAMA and capital required, at that stage the only assurance that could be given regarding confidence in the institutions would be given by plain unvarnished equity with no guaranteed return and simply long-term participation in the institution as an economic stake. With regard to the two institutions, one comes back to various other propositions under which we retreat into an economic Stone Age where we do not have a banking system and the institutions will not have any long-term value.
This turns on the question raised by Deputies Michael McGrath and Burton about the risk to the taxpayer and I am sorry I did not reply to all the points raised. I refer to the risks involved. It is important to distinguish between risks. As I pointed out to Deputy Bruton, the first risk is that the whole country becomes insolvent. While that is a very remote risk, if one accepts the valuations that have been introduced into this debate by some commentators, the whole country, like the whole banking system, is insolvent and therefore there is nothing we can do to guarantee against that risk. According to them, that is where we are. Although the markets, the EU and the European Central Bank are not saying we are there, a large part of the public debate of the last few weeks has been bound up with the proposition that we are there. I do not think it is helpful that people are being invited to draw conclusions on that basis. The IMF has commented on the possibility of fixing the losses in the Irish banking system at a certain figure. I refer to losses throughout the banking sector, not just those being designated for NAMA. The figure in question does not take account of the provisions the banks can make to meet those losses. Such important points in relation to that risk are being missed in this debate. The second risk — the risk explicitly mentioned by Deputy Burton — is of overpayment in the acquisition of the assets enriching shareholders. The risk that a particular institution will benefit as a result of a valuation being made that is too generous to the institution is a more concrete one.
I did not speak about enriching shareholders. I mentioned the risk of overpaying in the context of its implications for the banks' loan portfolios and for developers. I asked the Minister whether he would give a commitment to give a detailed list so that we could get——
I dealt with that when the Deputy was out of the room. Banking systems throughout the world respect the confidentiality of customer business. If there is a default, clearly that comes into the public domain. We can look at the issue in terms of default. In terms of performing loans——
I do not think the Minister understands the point I am making. Perhaps it would be helpful if I were to clarify it. When the Minister came to the Dáil on the day of the emergency budget, he suggested there was €90 billion of impaired loans, most of which related to development land and related assets. Today, he said the gross value of those loans is €120 billion. I assume we are expected to rely on the figures in the Minister's most recent presentation. The Minister said we are talking about several hundred developers. Others have said the same thing on behalf of the Minister. We know that many of these loan and company situations are complex. I will repeat the question I have already asked the Minister. Will we get a list of the consolidated net obligations?
I think the Minister has answered that question.
He has not.
The Deputy might not have been here.
The number is in excess of 700.
I do not necessarily need to know the names and addresses of the developers. Perhaps they can be referred to as Mr. A, Mr. B and Mr. C, etc. There are well known ways of——
I am replying to Deputy Fahey. We estimate that there are 1,500——
The Minister attributed to me remarks that I did not make.
Very good. I accept that. Some 1,500 borrowers and approximately 18,000 loans are involved. Further information will be provided on this. I was defining the risks——
The Minister has previously suggested that the figure is approximately 10,000. That is a big jump.
Can I finish the argument I am making about risk? I am making a point about the hierarchy of risk. Some of those who are commenting on the NAMA proposal seem to be assuming that the main risk is that the country is insolvent. I am saying that is not the case. If it were the case, we would be in a far more serious situation. The response that should be designed to the situation we are in should be appropriate to that situation. It should not be appropriate to the estimates of a certain group of economists who have suggested the banking system is totally insolvent. That suggestion is not in accordance with the facts. The risk to the taxpayer is that particular institutions could benefit at the expense of the taxpayer because of an over-valuation of the assets. That is the risk to the taxpayer. It has nothing to do with developers, who are not involved in this. As loans are being acquired, the transactions will be between NAMA and the banks. The risk is that the banks' shareholders will benefit if the banks are paid too much for the loans. I have already pointed out that just two institutions——
I would like to ask a follow-up question. Will NAMA, in some form or other, not end up owning the assets?
I am entitled to finish.
I ask Deputy Burton to allow the Minister to conclude.
The taxpayer will end up with——
It is curious that the Deputy interrupts me when I try to complete a point that gives a focus to this debate. I am dealing with the question of how to prevent the enrichment of the shareholders in the context of this scheme. I was about to make the point that in the case of Anglo Irish Bank, which is in the ownership of the taxpayer, there is no risk irrespective of what is the valuation because the taxpayer owns the institution at the other end.
In the case of the other institutions, two of them are building societies, which leaves us with our two principal banks, Allied Irish Banks and Bank of Ireland. Again, when the valuations are declared, we will have a 25% protection on the risk by virtue of the warrants and the economic stake we have in the institutions in question. When we look through the valuations and see what the implications are for the capital structure, we will have a more exact figure on the extent to which we are protected on the risk of an overvaluation. Having concluded that process, we can look at what was mentioned in the course of the debate and by the European Central Bank, that is, what risk sharing mechanism we can devise to eliminate that risk.
I have a question.
I am completing an answer to a question I was asked about risk.
Deputy Fahey asked a question about insolvent developers. Developers who are insolvent will be liquidated. NAMA will have the full range of remedies already available to the banking system, including repossession, enforcement of mortgages, the appointment of a receiver and the liquidation of companies. In addition, a special statutory procedure has been inserted in the legislation to give NAMA, as a creditor, the right to obtain a vesting order in property to clean up the title to the property. NAMA has, therefore, a battery of remedies.
More important than the legal position of the battery of remedies available to NAMA is that the agency has every incentive to ensure hopelessly insolvent developers are liquidated because its sole statutory purpose is to protect the taxpayer and realise these assets. There is an understandable temptation in the current banking system, especially in the case of the larger developers, to resile somewhat from enforcement because of the implications which the insolvency of some of the individuals in question would have for the banks' balance sheets. This does not apply to NAMA, which has every incentive to seek enforcement, where appropriate.
In that case, why are the developers so anxious to get into NAMA?
The Deputy knows the economic pressure. As she pointed out, we do not want Japanese banks. Mr. Mulcahy may deal with the question put by Deputy Fahey.
Mr. John Mulcahy
With regard to my experience, I am a chartered surveyor and have been in practice for 39 years. I do not know if longevity is a measure of success. I am chairman of Jones Lang LaSalle, although resigned at the moment. I have been seconded into NAMA in a personal capacity and have nothing to do with Jones Lang LaSalle at the moment. I have spent my working life mainly advising pension funds and others on investment in property. On the question of whether I called the market, while my natural humility gets in the way, I have been a bear for the past four years. We sold down our pension fund property assets, which was not a popular course of action at the time. One's speaking engagement requests become very limited when one is a bear in the market.
I have spent considerable time charting the market back to 1971 since when we have had an index running. It is obvious that when yields in Grafton Street reach 3%, the market will only move in one direction. If one is a chartist, one recognises there will be reaction. The market was unsustainable but it was difficult to convince people that was the case when, year-on-year, they saw the opposite happening.
I was asked how the valuation process is to be executed. I am not in this on my own. HSBC is on the banking side. We did not start off with headline values of loans or property but decided it was better to start with where we are today and put in a solid foundation. This is done by requiring the covered institutions to obtain an independent valuation of the underlying security. We have defined an "independent valuer". It must be an external valuer within the meaning of all the valuation standards. We then set out in detail what must be the qualifications of the valuer, the template he or she must use to arrive at value and all the elements that go into it. In some cases, these were not in place when the initial valuations were carried out some years back. Therefore, we set out prescriptively what must happen to ensure verification of detail in every way. We have also insisted that the external valuer have adequate professional indemnity. In addition to having a duty to the covering institution which is instructing him or her initially, the valuer would carry a liability to NAMA also. When the process is complete, the professional valuation will be handed to NAMA. Simultaneously, NAMA will be carrying out the very detailed legal due diligence process on all the assets; therefore, there is a requirement for both elements to link up and cross-check. In other words, we are not allowing any assumptions to be made that are not realistic. We cannot make assumptions about planning permissions. We cannot make forward assumptions about zonings or floor areas. Everything must check out with the legal due diligence process. When it is handed to NAMA, we will review the valuation against the tone of the list with a panel of independent experts.
In the valuations that will come to us from the covered institutions the valuer must break down his or her valuation. He or she must show exactly how he or she has arrived at it. For example, he or she might use a residual approach to land, which is to start off by working out what can go on the land, what the value of the end product will be, subtract the cost of fees, planning levies, other costs and so on, put in a figure for a normal developer's profit, run in a discount rate and so on. We will then be able to see exactly how he or she arrived at the valuation. When we review it, we can take a view on the tone of the list. That is just an example for development land. We will look at the market valuation, with a view to moving it towards a long-term economic value. We will look at the norms that have applied to the market over a long period to see to what the market might reasonably aspire. The time period we will probably be dealing with is around seven years. That information goes in as part of valuing the bank loan. The bank loan will also be valued, having regard to the normal way loans are valued, but they will have two crucial pieces of information available. The first is the long-term value of the underlying real estate security and the second, its current market value.
The data we have on the Irish market dates back to about 1971. There has always been a recovery in the property market, although sometimes it has been more vigorous than in others. In general, the commercial market has recovered over a seven year period to an average of about 88% of where it was in the trough. These figures are from the Department of the Environment, Heritage and Local Government. For residential property, the market has recovered in seven years to a figure of about 96% of where it was in the trough. I am only saying this is what that set of data has shown, but the important point is that markets always recover. The one exception is Japan. The reason the Japanese market did not recover was that they never marked down asset values. The banks decided to take the write-down figure year on year; that is why it took so long. They never revalued their assets. The other seminal work was produced in the United Kingdom where researchers looked at property cycles dating back to 1921. They found that recovery in the United Kingdom took between four and seven years and that the marked recovered to an average of about 66% of what it was in the trough.
There was an important point made about overseas assets. We estimate that a figure of about 30% will be held overseas, much of it in the United Kingdom. The UK market is showing signs of recovery. I would expect it to recover a little earlier, which could be good news for borrowers and NAMA, as it may have assets in a market where liquidity to pay back the money will be available.
The Deputy asked about land on the outskirts——
I asked about Anglo Irish Bank's portfolio in the United States.
Mr. John Mulcahy
Yes. The United States is already in recovery. Normally, a downturn in the United States economy is followed closely by one here and in the United Kingdom, before spreading to the rest of Europe and the Far East. Likewise, recovery seems to follow a similar pattern. If the United States property market recovers, it tends to do so more quickly than in this state because there is more transparency.
I agree there is an issue in regard to the fabled landbanks on the outskirts of towns. There are many rural towns where the amount of land available for development seems to exceed dramatically any potential demand in the foreseeable future. The fact that a parcel of land might be ripe for development in 20 years' time does not mean it is worth much today. I expect much of this land to revert to agricultural value; that is what we will pay for it. Unless there is a long-term economic value that can be described, articulated and mathematically proved, there is no way we can assign a greater value to it.
To clarify, Mr. Mulcahy has indicated that an historical analysis of the data indicates increases of 80% or 90% from what the figure was in the trough. I assure members that the valuation provision in this legislation will not permit that type of increment from the basic market value. That is an important point. The allowance for long-term value is circumscribed by a statutory formula which includes a reference to yields and Government bonds. It is a far more restrictive formula than an historic analysis which suggests every trough is necessarily followed by an increase of 80% or 90%.
Mr. Mulcahy has indicated that markets traditionally recover to 88% of their peak level within seven years. Is that what the Minister is saying?
No, that is not what we are saying. Perhaps Mr. Mulcahy will answer that point.
Mr. John Mulcahy
There is a view abroad——
I call Deputy O'Donnell.
Will the Chairman permit Mr. Mulcahy to finish?
I thought he had finished.
He was responding to the point raised by Deputy Lee.
Mr. John Mulcahy
There seems to be a view abroad that the market will not recover and that NAMA will look at values on the basis of this recovery that will not happen. I accept that we cannot foresee the future. However, I have indicated the results of an analysis of every cycle I can find, without any forcing of the data. On the basis of every trough I can identify — a trough is defined as minus 50% from the peak, which I suspect we are currently at — the net result after advancing seven years is plus 88%. There have been instances where the market has been higher or lower than that, but this is the average. I can find no evidence of a period when there was no recovery following a trough.
Except in Japan.
Has there ever been such a deep trough?
Mr. John Mulcahy
No.
That is why the recent bubble is excluded from the computation of the valuation formula.
I thank the Minister and his colleagues for attending. Many of the issues have been discussed. Mr. Mulcahy is talking about peak to trough figures. We have never had anything like the property bubble we have had in recent times, nor the subsequent reduction in prices. One cannot say with certainty that values will recover within a defined period on the basis of historical analyses. We are in unknown territory.
Does the Minister agree with Fine Gael's position that we must protect taxpayers' interests and that there must be a sharing of the pain? I acknowledge his statement that there should be a sharing of the pain in regard to subordinated debt. My understanding is that subordinated debt in the banks is currently of the order of €16 billion or €17 billion. It is not an inconsequential amount but constitutes a significant amount of money.
Does the Minister not agree that funds must flow to the real economy? Our difficulty is partially due to becoming over-reliant on the property sector. However, in NAMA again we are turning around and seeking the solution within the property sector. The point I wish the Minister to take on board is that since last April — not simply in recent days — Fine Gael as a party has been pushing the protection of the taxpayers' interest which boils down to valuation. The Minister has a significant input into the process of coming up with a useful economic value. While he has spoken about current market value, under section 59 he has a serious input to make in moving from current market value to useful economic value, whereby he can make regulations "providing for the adjustment factors to be taken into account". Was the advice to which he referred in his presentation from the European Commission or the European Central Bank?
The central bank.
The European Central Bank stated the premium paid above the current market value should not be excessive. It strikes me that the bank has worries in this regard. As for transparency, there is a strong need for an oversight mechanism within NAMA, distinct from an Oireachtas committee, to oversee how the process has worked in respect of evaluations.
While the European Commission also referred to the sharing of risk, I can see nothing in the NAMA legislation that provides for such risk-sharing. What are the Minister's views on the proposals to have staggered payments for the assets? Second, what are his views on the proposal that the ordinary shareholders and subordinated debt holders effectively be given a share in NAMA? Consequently, they would share in both the upside and the downside. Nothing in the NAMA legislation provides for the sharing of risk. Fine Gael is strongly in favour of the protection of the taxpayer and I would like to think the Minister thinks likewise. As he has said so often enough, he should take Fine Gael's proposals on board.
Moreover, nothing in the NAMA legislation provides for the funds to be raised. The Minister intends to give Government bonds to the banks and under the current NAMA legislation, they certainly can let these bonds sit on their balance sheets. What does the Minister propose in this regard? While Fine Gael's proposed national recovery bank is about ensuring funds would flow to the real economy, NAMA provides no assurance in that regard. What proposals will the Minister bring forward in this regard? A minimum amount of the funds drawn down by the banks through the European Central Bank should be provided for small businesses. I seek the Minister's views in this regard.
Does the Minister not have worries in respect of NAMA? Although he has referred to a loan to value ratio of 75%, it is generally acknowledged that during the years 2005 and 2006, when matters went out of control and development loans doubled, many of them were 100% loans.
That will be established during the evaluation process but is not what I have seen to date.
However, I refer to putting it out that there is a loan to value ratio of 75%. Much of the chronic or toxic debt is geared significantly above that level, which should be acknowledged.
In addition, does the Minister not have concerns about many of the land values? Leaving aside unzoned land, figures from the Department of the Environment, Heritage and Local Government suggest nearly 1 million units could be built on land that has been zoned for residential development but which has not been built on. That is approximately a 20 years' supply at 50,000 units a year, which will cause grave concern for NAMA regarding the value of the assets. It is extremely important that the Minister takes on board what we as a party have put forward. He appears to be intent on going after spurious points when the key points we are making are that there should be a sharing of the burden between subordinated debt, the developers and the banks, and the taxpayer should be the last to have to take it up. That is not the case under the NAMA legislation.
It is.
It is not. Can the Minister tell me where the subordinated debt holder——
I will come to it.
With regard to the valuation, we must have staggered payments and a mechanism whereby subordinated debt and ordinary shareholders get a percentage share in NAMA so there is an upside and downside risk. The main reason we supported the guarantee scheme at the time of the banking crisis was to ensure that funds would flow to business. Potentially, up to 500,000 people could be out of work by the end of the year. They are looking in and seeing that on the face of it NAMA is dealing with toxic developer debt while they are under severe pressure with their mortgages. We need to put this in the context of people's lives. What will NAMA provide that will reassure people that their jobs will be maintained and that credit will flow? I can see nothing in the Bill that will provide those guarantees. I would like the Minister to take these observations on board in the spirit in which they are given. Fine Gael has been raising these points solidly since April and I ask the Minister to address them.
Will the Minister include a provision in the NAMA legislation to deal with ordinary homeowners who are under enormous pressure with their mortgages? This issue will grow. People are falling into arrears through no fault of their own. When the Minister is considering NAMA will he take into account those people whom we are elected to represent and look after their interests?
I will ask Deputies Chris Andrews and Terence Flanagan to put their questions.
My questions are very specific and perhaps the Minister could deal with them first.
I call Deputy Andrews.
I welcome the Minister. His engagement has been very helpful and has brought much clarity to this debate.
Chairman, I must leave.
NAMA does not have a moral role to seek justice but it is important that people are reassured that those who have behaved irresponsibly in the past are not allowed to behave in such a manner in the future. The Minister referred to a delinquent developers list. How will he construct such a list? Will every developer who comes under the remit of NAMA be included on it?
As NAMA gets under way, does the Minister anticipate much consolidation of the banking sector? It will have implications for employees in the banking sector and I hope that in every way possible the Minister will ensure that workers in the banking sector are protected from cynical cost-cutting exercises. I hope he will be able to protect those workers in a consolidating banking structure.
I have three questions for the Minister. Does the Freedom of Information Act apply to NAMA? Will it be possible to get details concerning the prices paid for the various developer transactions? From the point of view of transparency and accountability it is important that in the fullness of time it should be possible to scrutinise this level of detail. Obviously at this time there is a level of confidentiality but perhaps further down the road that information might be available to people who seek it.
Is it possible to state how many properties will transfer to NAMA? Will there be any social dividend, particularly with regard to the large numbers of people on housing lists, which amounts to over 57,000 households? It is crucially important that some kind of assistance should be seen to be given to some of these people to get them onto a property ladder.
What kind of derivatives instruments will NAMA consider for purchase?
I shall finish my question which will not take a second. I declare that I do not have any bank shares and I am not aware of any interest that would affect my presence at this committee.
I have listened very carefully to the Minister and I accept that he is approaching this in a genuine way. However, I ask him to accept — which I believe he has done — that Fine Gael is trying to approach the issue in a genuine way also, even if there may be differences. The main difference that bothers me is that there is no provision for recovery in the Minister's proposal. That is why the recovery bank concept is so important.
I have a reason for making this point. The Minister can talk about valuations but I believe the only time that property prices will rise again is when there is demand. As long as there are businesses going out of business, with people becoming unemployed, demand will be less. I am not a professional valuer but I know one thing. The cost of a house is the cost of building it plus the cost of the site. After that, its cost is a matter of how many people want it. If there is no demand the price will be affected. Therefore, as part of the overall recovery plan there must be a recovery bank to make funds available to the market to get businesses growing and expanding, new businesses set up and, above all, jobs created. If we have that there will be a demand for office space and commercial buildings, and a demand for individual housing, whether houses or apartments. This is when demand occurs. In the past there was a net inflow of people into this country. Units were built on the assumption that this growth in population would continue. We now have emigration and there are vast numbers of vacant properties. I do not care what qualifications a person may have. Unless there is a demand for those units their value will continue to reduce.
The other fault I find is that if there is to be foreclosure on a number of these developers there will be another flood of properties onto the market. The Minister can respond to me in a moment. My point is that the law of supply and demand will still apply and unless we have the recovery that is needed in the economy, whether it is NAMA, the Fine Gael proposal or the Labour Party proposal, it will not make a damn bit of difference. Unfortunately, we have a disagreement on a political level on how we deal with this issue. The Minister has gone down the road of high taxation. I maintain that is the wrong approach. He is also going down the road of sorting out property, who owns it and how we can be repaid for it. This is set against first putting money back into the economy in order to achieve growth. These are key issues concerning the valuations that will eventually be put on all the property that will end up in State ownership through NAMA.
Are there legal requirements where personal guarantees were given, for example, to AIB and they are transferred to NAMA? Will the State be involved in the legal transfer of these guarantees to NAMA or can this be done in a simplified fashion? Will the State be involved in a heap of costs and delays in this regard?
Further to what Deputy O'Donnell said and his question relating to the provision in the legislation which is intended to get banks lending money, which is our objective, will the Minister clarify how we can ensure this can happen? Will he consider adding to that provision a proposal I have forwarded to his colleague, the Minister for Enterprise, Trade and Employment, relating to the State getting involved in lending? This would be an additional measure. I have proposed that Enterprise Ireland get involved in lending directly to small business as an additional measure. Will the Minister consider this?
I thank the Minister for the clarifications he has provided and the Chairman for arranging this meeting. Deputy Barrett and I are former Whips of our parties and I am conscious of the fact that the normal procedure for dealing with legislation is Second, Committee and Report Stages, invariably concluding with the use of a guillotine. In this case — the Chairman is due our thanks for this — we have put together a committee of Members, many with expertise. We have been given further clarification about issues such as subordinated debt, senior bondholders and valuations. Further information will obviously come to light when the Minister presents the estimate on 16 September of how much will be paid for the loans.
I strongly support the view expressed by the former Deputy and Taoiseach, Dr. Garret FitzGerald, who has asked Members to try to find agreement on this issue alone, leaving aside the budget and the Finance Bill on which we will revert to our traditional ways of opposition. On foot of today's discussion and what I have heard from Opposition Members, there is a basis for this. We will not agree on everything but this is too important for future generations for Members to use traditional methods of division for the sake of division. I do not detect that approach today. The Minister has offered to put his advisers at the disposal of our Opposition colleagues between now and 16 September. It is vital we do this. On an all-party basis, this meeting has been a good exercise due to the procedure that has been used. We should do it more often.
It has been suggested there be a watchdog body to help us with the fall-out from this legislation. I support that suggestion. I appeal to Opposition Members to try to improve the Bill as far as possible with us. We should use this opportunity, for the sake of the national interest, to ensure we achieve the right Bill. I believe we can do this.
I thank the Minister for his generosity in coming forward with his genuine suggestion.
It is all very well appointing watchdogs but one must ensure they bark. That is the key point with watchdogs.
It depends on the dog one buys.
One must also ensure they do not bite one.
That tends to be the conflict.
Credit supply was mentioned by Deputies Kitt and Barrett. It is obviously a fundamental issue. I cannot disagree very much with what Deputy Barrett said. I am not in favour of high taxation and have made the point that income tax is at its limit.
With regard to personal guarantees, they will transfer to NAMA. NAMA must be in the same position as the bank from which it takes over the loan.
I agree with the Deputy regarding foreclosure. If a flood of property is dumped on the market, it will be utterly unsustainable. That is one of the reasons we must establish NAMA and try to establish a floor in the market. We are very near it on the basis of the figures and data we have about the yield from property. The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough. We must banish our devils, the suggestion that we have further to go. That is part of the problem and the reason for the illiquidity in the housing market.
Reference was made to the recovery bank. I have made it clear I will examine the merits of the Fine Gael proposal as well as detailed amendments to this legislation. I am open to that but I pointed out that the logistics of having that bank up and running and contributing to a recovery in the short period between now and December 2010 are difficult. However, I agree with Deputy Barrett that his party is prepared to take——
The key focus behind the recovery bank is to get funds flowing to small business and into the real economy. Where does the legislation facilitate this?
The Deputy came close to answering his own question. He is concerned that the paper issued by the Government will lie on the banks' balance sheets and not be presented and traded on world markets for cash or presented to the ECB for cash.
That is one of two key concerns. The other is if they obtained money, they would not use it for small business.
As I pointed out to the committee when we had a good discussion on banking last spring, which Deputy Burton referred to in complimentary terms afterwards, the key problem in the banking sector is funding. The mere possession of those bonds on their balance sheets will generate huge confidence in the institutions that have them. They can be used to access liquidity but they will also make it easier for the institutions to access liquidity. The effect of this is that the balance sheet in terms of assets will be deleveraged and, therefore, smaller but the balance sheet in terms of funding available will be larger because the bonds will lie on the balance sheet. They provide a more certain return as they are measurable and can be presented for cash.
In the case of Anglo Irish Bank, for example, the Deputy's party has advocated a policy that we should deal with this bank over time. NAMA has a huge implication for the bank because of the sheer volume of assets that will be taken off its balance sheet, which will downsize the institution, and the liquidity provided through the bonds will have to be presented to the ECB to eliminate the emergency liquidity. Whatever residual bonds are there then stand on the bank's balance sheet, making it a much smaller risk to the economy and the banking system than it has been.
I know that.
I am illustrating how the consequences of NAMA for the three main banks will work out. In the case of Anglo Irish Bank, which we identified as a major problem and nationalised, we have had a tremendous job stabilising this bank. We have stabilised it and we have had to make substantial capital injections.
It has not lent a red cent in new business.
It was not in a position to do so, given the state of its balance sheet.
It is serving no purpose.
Yes, but there is no purpose in asking the taxpayer tomorrow morning to pay €64 billion because Anglo Irish Bank has ceased to be a bank. That is the difficulty I have as Minister. I cannot ask for that to happen.
I accept that.
At the time of nationalisation, Fine Gael said it wanted this worked out over time and that is precisely what is happening because the work out involves a substantial portion of the bank's assets, the downsizing of the bank to a much safer book——
An orderly wind-down.
This is orderly. I did not use the expression "wind-down" and I take issue with that. I referred to an orderly reduction in the size of the balance sheet on a once off basis that substantially de-risks the threat the institution is to the economy and the banking system.
As I explained to Deputy Bruton, the other banks are not insolvent entities. They are functioning banks operating under stressed conditions. The effect will be a substantial excess of liquidity, as well as a running down of their less viable assets. That solution can be implemented in the next few months. The Deputy suggested some other line of credit should be provided and I am willing to examine that because——
It is simple. If the banks go to the ECB, how will the Minister guarantee that they will give some of the funding they draw down to business?
First, one can only guarantee that when the institution is in a position to fund itself. That is the core issue. The position has been so serious in this country that the institutions have had difficulties in funding themselves in stressed world markets. Clearly, the effect of the NAMA operation, with smaller balance sheets and more liquidity in them, is to put these institutions in a far better position to access funds and, of course, strategically move away from the guarantee. That is exactly the purpose of this operation.
I do not want to get into an argument about the Fine Gael proposal. I have indicated that I am prepared to look at its positive elements. In substance, the proposal is that, somehow, we set up a new bank which could immediately lend a lot of money and, meanwhile, we put a death sentence on the rest. That is not a feasible or graduated strategy for the banking sector today. That is the difficulty.
With regard to Deputy O'Donnell's other points, he, rightly, says the recent peak in the property bubble was unprecedented. That is why the formula we are using in the valuation methodology must exclude it in the analysis of yields from property. Both the jump and the fall were ludicrous.
Tackling subordinated debt is an ongoing process. It is not something one can compel. There are difficulties with it but the banks have made a very big start on it and I have no doubt they will continue to do it. All of this is being done in an international marketplace context. Ireland cannot suddenly jump out of line with regard to debt. That is the point I am trying to get across. This is not Argentina; this is Ireland. We do not have a record of jumping out of line with other countries with regard to what one honours and defers. If we start to get into that terrain, our credit worthiness as a state, as well as the credit worthiness of the banking system, will deteriorate and the speed of the recovery will be less.
The regulations on adjustment factors will be published. With regard to looking at what we can extract from the banks in terms of credit supply, I will examine the matter. I agree with Deputy O'Donnell. I was merely setting the general context for him. This does not mean I am not positive about what he is saying.
Deputies O'Donnell and Burton both referred to the loan to value ratio. Deputy Burton is concerned that 75% is a very low level and that there were 100% arrangements. Clearly, if that emerges in the statutory valuations, it will be very serious for the institutions concerned. I am imparting to the committee the information I have amassed to date which suggests a 75% level. That information is provided in due diligence exercises and the PricewaterhouseCoopers report. It is not new information established in the last few weeks. We must always guard against the over-optimism of financial institutions. That is why one must have a statutory process to undertake evaluations.
The Minister's adviser suggested he anticipated a fall to 88% at a maximum over a seven year period. This suggests that when one puts the two answers together, the adviser's words and the Minister's own statement, the discount contemplated is very low. The adviser said that in his experience of property markets, in the long term——
He said they went up to 88% from the troughs.
No, he said they would return to 88% of value in the medium period.
One needs to clarify the matter.
What was the reference to the figure of 88% then?
I cannot comment until he tells us what he actually said.
Mr. John Mulcahy
I said that taking the average of all the cycles, commercial property recovered to a figure of 88% from the trough; that is the bottom.
If that is taken as an historical formula, it suggests the discount will be relatively small, probably well below 20%.
That is why I indicated — I am sorry the Deputy may not have been here when I said it——
If the Minister gave us a piece of paper, we could work it out.
I made it very clear that in looking at that evidence, it could not be the basis of the long-term value. It was far too excessive in terms of the assessment.
The Minister's independent valuer has told us differently.
He has not. He told us a fact. The statutory formula in the legislation does not permit us to go up 88% for the trough or anywhere near it. That is the point I was making to the Deputy. I made that point specifically when he had said that. The assessment of any long-term value must be limited. It is a limited allowance which one adds to the market value and cannot be based on 88% from the trough, or anything near it.
I am allowing for that, which is the reason I said 30%. If one takes the 88%, obviously the percentage is even smaller.
I am not going to speculate.
I am merely doubling his figure.
The estimate is still being worked on. I am not going to speculate on the precise figure, which I will give on 16 September. Mr. Mulcahy mentioned that figure to show how remarkable the pace of recovery is from troughs. As I clearly stated, we are not allowing the recent property bubble to be taken into account.
I heard what the Minister said.
Yes.
Perhaps the Minister will respond to the other queries raised.
I asked about mortgage holders.
We have given the amount in terms of extending the code of practice to all mortgage holders. The recapitalisation of the two main banks restricted repossessions substantially. We can continue to look at proposals in that regard.
I believe I have dealt with the other queries raised by Deputy O'Donnell. On Deputy Andrews's question, we do not have a blacklist because we do not yet have defaulters. The key point is that NAMA will not allow a defaulter buy back an asset at a lower price. This will be provided for in the legislation which is currently being worked on.
As regards bank staff, I am in regular discussions with the IBOA. The Freedom of Information Act does not apply. Deputy Flanagan has suggested it should apply after a period, which is an issue we will look at. The question was raised as to whether a social dividend can be obtained from this. I have not addressed this issue in the legislation because it is important, from the point of view of the taxpayer, that this is seen to be a value for money operation, that the income stream from the assets acquired will refund the repayment of the bonds and that the formula in relation to valuation will ensure that the taxpayer is protected against the risk of a bank enriching itself at the taxpayers' expense. All of these issues are being worked on and dealt with. It is important that the legislation is transparent and in the interests of the taxpayer. I accept there is risk transfer to the taxpayer but we have to eliminate that risk as much as possible.
As regards a social dividend from the assets which NAMA will acquire, it is open to this or future Governments to acquire a social divided from it. This will reduce the profitability of NAMA but if there is a social dividend that can be obtained from it, it will be obtained. I believe there are two specific areas where a social dividend can be obtained from NAMA. The first and most fundamental is that we prevent the recurrence of another property bubble. I thought the criticism by Fintan O'Toole that NAMA was designed to create another bubble was wide of the mark. In fact, given the volume of property which NAMA will have, it will be possible for it to release land on a gradual basis to developers and smaller units, providing an orderly development of the property market and ignoring the type of market we had in Dublin and more generally in Ireland in recent years where a small number of developers were able to corner the market and fuel a huge increase in speculative land prices. NAMA could prevent that happening again. Again, it is important, if that is to be the NAMA policy, that the Government of the day — I hope the current Government will be in a position to do so — looks at NAMA commercially, in terms of this legislation, before it decides on the implications of such a social policy. There could also be opportunities in terms of the provision of land for public purposes in terms of school and community development. That can all be looked at. It is important, because the whole focus of the debate has been on the taxpayer, that we get this legislation right as far as the taxpayer is concerned.
Mr. McDonagh will deal with the question on derivative instruments.
Mr. Brendan McDonagh
As the associated loans are commercial loans which are linked to the land and development borrowers, many of them include interest rate swaps whereby the receiver is allowed to swap with the bank a fixed amount under a lease thereby hedging his or her loan exposure rather than being exposed to rising rates.
I am genuinely interested in this issue and would appreciate if Mr. McDonagh would speak a little slower and into the microphone. He is losing me completely.
Mr. Brendan McDonagh
I apologise. Most derivatives are related to commercial loans. The commercial loans are the associated exposures for the land and development borrowers who also have commercial assets. These interest rate swaps are taking place to hedge them against rising interest rates. At the start of the loan there would have been an interest rate swap with the bank. Their fixed receipt under the lease agreement with the commercial tenant would have been swapped with the bank. They would have received a floating interest rate in return to try to hedge the loan. The derivatives that will come to NAMA will be related to the commercial loans. It has been suggested elsewhere that we are taking the trading books of the banks. That is not the situation. Under the accounting regulations, extensive paperwork is involved. It links the actual derivatives with the actual loans. We will be able to trace this back into the institutions to get the derivatives which are associated with the loans. Most derivatives are interest rate swaps.
In that context, does the Minister have a listing of the derivatives and the valuations? Is it not the case that some of the swaps are cross-swaps? I reiterate that we need a net consolidated position in relation to each developer or group of development companies, as well as a valuation of the loans, obviously, and a listing of the credit default swaps on them. Will we receive this?
Mr. Brendan McDonagh
The derivatives will be directly linked with the underlying loans. If a borrower's loans are coming across, the derivatives will be linked with them. As I said, we have asked the institutions for information on the size of the derivatives book associated with the commercial loans and the market value of these loans on 30 June. We are still compiling that information. It is obvious that when the loans are valued, we will also have to value the derivatives. They are intricately linked together. That will form part of the valuation process.
One of the crucial and central problems in the Government's consideration of NAMA was that a single agency had to be constructed to do this work. In some jurisdictions the practice of setting up a separate asset company in each financial institution was considered. We examined that possibility. One of the difficulties in Ireland is the degree of cross-collateralisation across the system, the complexity of the instruments involved and their relationship with different institutions. That drove us to the conclusion that we had to establish a single entity to work out these assets. That was a key influence in the Government's decision.
Does the Minister not agree with the point of view of the Opposition that the citizens of Ireland need a consolidated net summary of each position? Is Mr. McDonagh thinking — if the NAMA legislation is passed — of creating derivative-type products by securitising NAMA's portfolio of assets down the road? It is clear that such powers are provided for in the Bill. Will NAMA securitise the assets and sell them off in bundles?
Mr. Brendan McDonagh
I suppose, in terms of securitising the portfolio, that it is not a derivative. It is a question of refinancing the portfolio, packaging the loans and selling them on. It is obvious that NAMA will have the ability to do derivatives. Personally, I do not see the need for NAMA to do derivatives.
Will NAMA securitise them?
We will move on.
Will NAMA securitise some of them?
I call Senator MacSharry.
This is a really important point.
I will then call Deputy Shatter and Senator Ross.
This is actually a really important point.
On that issue, it is important that Mr. McDonagh be given an opportunity to finish his reply.
I had intended to come in on this issue. NAMA has powers other than in the creation of derivatives. If large-scale borrowers in England or the United States can access a bank to get funds to buy out their Irish borrowings at a discounted rate, will NAMA consider this?
Mr. Brendan McDonagh
It is obvious that NAMA will have a commercial remit. As the Minister said, it will be able to buy a loan portfolio at a significant discount from the book value set out by the bank. It is obvious that there could be situations where, first, the board of NAMA will ask the Minister to try to refinance the risk to the taxpayer by securitising the portfolio, or something like that. We have already received approaches from a number of private equity interests interested in buying the loan portfolios of NAMA. To take a simple example, if NAMA bought a loan portfolio with a book value of €100 million for, let us say for argument's sake, €60 million, and someone came along and offered to buy this portfolio for €70 million, there is provision under the legislation for NAMA to sell the portfolio at that price. Clearly, the NAMA board will not sell the portfolio for €50 million as to do so would result in NAMA realising a loss.
Included in the legislation is the concept of retaining assets based on securing a long-term economic value for the taxpayer. I am interested in the timeframe for achieving this. A question arises as to what the word "long-term" means. Surely there is a national interest and a liquidity interest. I am hearing rumours that groups and individuals outside the State are interested in buying part of the NAMA loan book when NAMA acquires it. It is important the loan book is not sold at levels which are too low.
In addition, the State and taxpayers have an interest in realising the loan book at the disposal of NAMA in a profitable manner, if possible. There is a danger that difficulties could arise if those who acquire part of the loan book then seek to put property on the market. Such persons would want to make a profit in the context of acquiring the loan book. If they start suing on the loan book they have acquired, a whole series of different combinations and permutations of difficulties could arise. To what extent will this issue be addressed through the rules and regulations the Minister will issue? Will the matter be left to the discretion of those running NAMA?
Again, we can look at the legislative arrangements. However, the Deputy's general point is absolutely correct. Since the nationalisation of Anglo Irish Bank, the bank and the Department have had numerous approaches from individuals who wish to buy assets of the bank. Plainly, these individuals believed that the bank and country were distressed and they could obtain these assets at a significant discount. We have set our faces against that and adopted the approach that we must take the long view. Similar issues may arise in the case of NAMA and the agency will have to operate in accordance with a commercial mandate.
The Deputy's question draws attention to another significant advantage of the NAMA arrangement over everything else that has been proposed. The Irish construction and development industry, which we have discussed all afternoon, had a very limited financing mechanism. Essentially, it borrowed from banks, generally through private limited companies but sometimes in person with cross-collateralisation in the form of personal guarantees. In the United Kingdom market, many more developers are able to access private equity through stock market quotation. One of the biggest problems in the development and housing market in Ireland is that the financing mechanisms were so crude and simple. One of the advantages of NAMA is that this very large portfolio, managed with such financial expertise, will allow the attraction of private equity at proper rates into investment in the book, either as loans or in the form of realised securities. All of this will enable a proper financial functioning to resume in the sector on a market basis. One of the very large advantages of the NAMA proposal is that it allows this process to take place. Expressed in other words, as well as dealing with zombie banks, we have to deal essentially with a zombie developer structure.
A zombie residential market is the other problem.
Crucially, this also creates an exit mechanism for the risk to the State. If commercial funds can be attracted to these marketable and realisable assets, as I believe they will be, the size of NAMA becomes less and less.
In such circumstances, who will make the decision? That is an important point.
The board of NAMA has to make the decision. The Oireachtas, with 166 Members, cannot do so.
I am not asking that it does so. Are guidelines in place?
I presume the board would make any such decision on a commercial basis based on the objectives prescribed by the legislation.
Yes.
If the foundation is not right, we could be left with the dross only.
I am glad Deputy Rabbitte raised this very important issue, that is, that at the end of the day we may be left with some rather silty material in the engine. NAMA will have the capacity——
If somebody wanted to sell a block of apartments, then they might in about 300 years' time if they are lucky.
NAMA will have the capacity to dispose of a whole part of a portfolio, so the bad and the good will be disposed of in the one operation. The key point is that we can attract private investment and private equity into the consolidated book, whether it be of loans or assets that have been realised by the enforcement of the security.
Is it intended that NAMA might bundle loans, both good and bad, and try to sell them to investors, as opposed to just isolating and cherry picking the good loans?
Yes, that has been the experience in the US and that is exactly what we envisage. We have to value individually, but we cannot reserve the few fields——
I only have three more questions.
Senator MacSharry has indicated that he wishes to speak.
I do not want to get in his way.
I agree with Deputy Kitt. We are all for Dr. FitzGerald's recommendations over the last few days, and they are in the best interests. I congratulate the Minister and his officials for their competence——
Will Dr. FitzGerald be nominated for President, by all-party agreement?
He will enjoy the support of the Labour Party.
I will accede to Dr. FitzGerald, if Fianna Fáil supports him.
The last I heard the Taoiseach talk about Dr. FitzGerald's economic astuteness——
Interruptions.
Can we have order please?
I have some engagements later.
Meeting the infants.
We have been given a great outline of the position from the Minister and his officials. I have great confidence in much of the detail that has been brought forward for us today. The Minister cautiously mentioned the possibility of a commission that might be in a position to be informed of some of the sensitive information that NAMA may have to consider. That would be welcome and the public would have greater confidence if that could be assessed.
The Minister stated he is prepared to examine mechanisms that could cover potential loss. While we all hope there will not be a loss and that there may be profits at the end of the day, there still may be some loss. As a result, there has been a suggestion of a two-payment method, including perhaps a bank levy. Will the Minister be in a position to confirm there will be a mechanism for dealing with that loss?
Let us take an example of a developer who defaults and who had a portfolio worth €100 million. NAMA takes the portfolio and the developer cannot pay the loan. After a few years, that individual might be in a different financial position and if NAMA will be selling the portfolio for a price that the individual can pay at that time I do not believe it would be acceptable to the Irish people that the person could secure those assets. Will we have mechanisms to ensure the public get their pound of flesh? Constitutionally, we cannot prevent him from going back into business, but I am only referring to the specific assets that were taken by NAMA.
I know there are 25 or 30 people being picked for the valuations panel, including five for different parts of the country, five for the US, five for Britain and so on. To what extent have we ensured that the directors of the firms that will be picked are not compromised, given that many of them might have been involved in auctioneering firms? We need an objective valuation to give the public confidence on that issue.
This is a very valuable procedure. There are differences between Fine Gael and the Government on the structure we would like to see in place to tackle the problems that exist, but it is extremely valuable to have a draft Bill and to discuss it at this level on an issue of this importance.
I wish to ask the Minister two blindingly obvious questions that no one seems to have asked yet. First, when will the Bill be published? We have to hand a draft bill and I understand there are some changes to be made to it. The debate is scheduled for 16 September and as the published draft is a highly complex document, it is important to publish the Bill without much further delay as the first days of September approach.
The second issue of importance is that we have heard much about the difficulties concerned with long-term economic value. Assessing long-term economic value in these circumstances is a journey into the unknown worthy of the Starship Enterprise, as such a myriad of factors is applicable in this regard. I listened with great interest to what Mr. Mulcahy had to say and the legislation details specific factors of which NAMA must take account. However, I understand the greater detail will come with the Minister’s regulations. Consequently, it is of considerable importance that the regulations also are published in draft form a good number of days before the Second Stage debate starts because they will influence that debate and flesh out the factors applicable to the determination of long-term economic value.
While I do not wish to repeat other people's comments on that issue, I wish to ask a question of Mr. Mulcahy, in particular. One point which people have made in this context and which is worth repeating is that the level of property collapse experienced is unprecedented in the history of the State. This is not simply a minor bubble or rearrangement but has been a major collapse within what could best be described as catastrophic unprecedented economic circumstances. Our banks have never been in this position since the foundation of the State and we are in entirely new territory. Mr. Mulcahy made reference to the Irish market in the context of an historical examination of recoveries in the property market. However, there is a difference between the Irish market today and any of the previous historical comparisons. Previous historical comparisons pertain to periods when we had the Irish punt which was a soft currency that moved up and down in ways we could not control. Moreover, we experienced devaluation on occasion which had an impact on what happened subsequently within the property market. Ireland now uses the euro which is a hard currency and is in a different environment. Property movements in other countries using the euro since the currency was established have not been at the dramatic levels observed here. For example, the position in Germany is entirely different in that context. While trying to assess these values, to what extent has the currency difference been factored in? In the English experience to which Mr. Mulcahy referred, one is dealing with the sterling area. Sterling is a hard currency and his description of what occurred in that area is correct.
That is a brave description.
Sterling was a hard currency until relatively recently. However, the periods Mr. Mulcahy examined were at a time when it would have been so perceived. I wish to ascertain the extent to which Mr. Mulcahy factored in that difference.
There is a genuine reason for everyone to be concerned and not sanguine about the concept of long-term economic value. While the Minister batted with a relatively straight bat to try to steady the ship, ultimately this is not a term of art but a subjective assessment that must be made betwixt and between the different value levels when all the factors are applied. This is something that could easily be got wrong to the detriment of the taxpayer.
I refer to a matter that has only been touched upon by one of my colleagues and which has not been explored to any great extent. There is an elephant in the room that is not being addressed. NAMA essentially has been concerned with dealing with land and development loans and the commercial sphere. The elephant in the room is the growing number of impaired residential mortgages and residential loans. In the years when the property bubble was at its height and between 2004 and 2007, in particular, financial institutions were not merely offering people 100% of the capital value of what they were purchasing. Some were topping it up by 10% to assist people either in paying stamp duties or to facilitate their purchase of new cars.
I listened to what was said about percentages. I do not know what work, if any, has been done by way of due diligence on the main financial institutions with regard to the possible impairment of residential loans; what that means for their capitalisation; and the implications of that as we head into 2010. One of the difficulties at present is that we simply do not know the level of impairment. Recently Irish Life & Permanent told us that it has 6,000 residential mortgages in trouble. I do not know the position within other institutions.
Correctly, the Government instructed the institutions to give leeway to people in mortgage difficulties because of the current economic circumstances and loss of employment. However, I understand the leeway the institutions were instructed to give people was 12 months with regard to mortgage arrears, in particular if people were making interest repayments. Recently, AIB announced that for those who had residential mortgage difficulties they were cutting back the period allowed for interest repayments from two years to one year. For the bank that might appear to be taking a tough decision but from the perspective of residential mortgage holders it may create huge pressures for many of the 450,000 who are unemployed and who cannot currently maintain their mortgage repayments. It may create more bad debts and may result in a deluge of court cases in 2010 in which the financial institutions seek repossession. A capitalisation issue is raised; I do not know the economy of scale of the level of residential mortgages that may be impaired that could give rise to substantial difficulty.
I will not pretend to know the legislation inside out but from recollection it is either section 56 or section 58 which details the type of loans that NAMA can take over. It is envisaged that there are bundles or classes of loans other than those in the commercial developer loan area that can be taken over. Is the Minister considering that at some stage NAMA may have to take over a portion of the impaired residential loans from the banks?
Recognising commercial reality, the legislation, in sections 10 to 12 which detail the powers of NAMA, gives a broad range of powers to it to do a variety of things including compromising loans and dealing with individuals who are in major financial difficulty. There is an inherent unfairness in the legislation in the manner in which residential mortgage holders may be treated differently compared to the way the developers who created the bubble and contributed to laying the foundation for the financial disaster confronting us may be treated.
In 2010 the banks may be taking thousands of cases to seek to repossess homes from homeowners, may acquire those homes and may sell them at a knock-down rate. The residential homeowners certainly will not get long-term economic value and those individuals may be left in substantial debt to banks for many years. On the other hand, developers whose debts are acquired by NAMA may find their situation is compromised, deals are done and arrangements are implemented that do not have the same devastating effect on them as may occur to impaired residential homeowners. What policy approach is intended to be taken in this context? Will new instructions be given to the banks? For example, it is reasonable that if individuals are in financial difficulties but are able to maintain their interest repayments they are given leeway beyond one year in situations of unemployment and major economic difficulty. This issue is of huge concern to tens of thousands of families in terms of certainty and avoiding disasters and the possible loss of their homes in 2010.
My final question concerns a technical issue. What is the position of what I describe as syndicated loans? As I understand the matter — the Minister will have more knowledge of it than I — some developers have entered into arrangements with different financial institutions, perhaps with one taking the lead. Some of these arrangements were entered into with covered institutions but others were with uncovered ones. I understand that in respect of certain major loans, NAMA will take over only a portion because they also involve institutions which are outside the remit of the agency. This would give rise to substantial difficulties and the loans are of a sufficiently large order to give rise to genuine concern. What approach will be taken to syndicated loans in such circumstances?
The Deputy asked several detailed questions. I am here today to listen and not simply to explain. The Government will not make a final decision on the legislation without hearing the views of the Opposition parties. That is the purpose of today's exercise and I will report to Government tomorrow on our discussions. We have prepared a number of amendments arising from our analysis of the Bill over the summer and we will work towards publication as quickly as possible. Clearly, side by side with publication of the amendments embodied in the text, we will announce our decision in principle to adopt certain other amendments. I will remain open to further suggestions beyond Second Stage.
The area of corporate governance needs to be teased out on Committee Stage. I do not believe we will progress the matter by taking an amendment now and then discussing it on Second Stage because the corporate governance structure devised for NAMA will have to be coherent. An idea presented now may be in conflict with another one at a later stage. While we certainly need a debate on the corporate governance structure, we need to refine our ideas on Committee Stage so that it has internal coherence in terms of accountability to the public, the Minister and the Houses. The answer in terms of drafting the legislation is "as quickly as possible" but the Government will also have to finalise several issues of principle upon which a statement of intent can be made on Second Stage.
In regard to long-term value and the draft regulations, I will be in a position to publish these at the outset of Second Stage. As it is not the Government's intention to guillotine Second Stage debate in its first week, there will be an opportunity to assess the regulations in the context of the debate. I take this opportunity to thank the officials of my Department and the NTMA and all the other advisers who are involved in this operation. It is a huge administrative task and an enormous amount of work had to be done to put the Bill into shape by the end of July. The regulations are being drafted for that date.
Deputy Shatter correctly pointed out this is the biggest crisis Irish banks have faced since the foundation of the State. International analysts have examined the Irish banking crisis and while they do not take the view that the banking system is entirely insolvent they describe the situation as very serious and in need of resolution.
I will ask Mr. Mulcahy to address the Deputy's interesting questions on currency fluctuation. Having a hard currency means low interest rates and, therefore, a resumption of credit if we tackle the basic problems but also that the hit goes straight through to the economy. The cost adjustments that have to be made to maintain our economic competitiveness are substantial and they cannot be executed simply by adjusting the levers at the Central Bank.
In regard to the other impaired assets being the elephant in the room, perhaps I can give some good news. I have had to give some bad news so far. The key point to understand about impaired assets in Ireland is that judging from the securitisation operation the banks have done, it would appear that the loan to value ratio on the residential mortgage book is between 50% and 60%. That seems extraordinary when one considers what we have all experienced.
The problem loans would be those taken out between 2004 and 2007.
Deputy Brian Lenihan. At the peak, especially those——
I do not see the earlier ones as a problem.
Exactly, but happily we have a large volume of such loans that are performing in the ordinary way. However, as the Deputy notes, there is a problem concerning the peak period. In the first quarter, the covered institutions carried out nine repossessions and in the second quarter, four. It is a cause of interest to those who analyse the Irish economy as to why the rate of repossession is so low. Typically, many analysts come from the United States or even the United Kingdom, where a far higher default ratio would have emerged given a crisis of our scale. One of the reasons it has not done so here is the very favourable loan to value ratio.
Another feature of the Irish economy which is unusual in the present crisis is that our household savings formation averages are much higher than those many other countries have seen which have a large incidence of repossession. I can only supply the data we have at present but when the IMF looked at the policy of the Government and discussed with me the establishment of NAMA, it suggested we should cover the possibility of a deterioration in assets in the future. "Possibility" was the word used. My own view is that we provided for it but we have no current plans to take over residential mortgage books.
I do not accept the Deputy's point that somehow developers will be treated more leniently than other borrowers with regard to debt. The reason for my non-acceptance is that NAMA has absolutely every incentive to squeeze whomsoever owes money and to squeeze the pound of flesh. One should not do what Shylock promised but NAMA will certainly squeeze whatever can be got out of the borrower. NAMA does not have a position whereby it has to work this out but can work out the assets simply to procure an advantage to its investor, the sovereign taxpayer.
There is an inherent contradiction in the legislation, namely, the situation whereby one takes over from a bank a debt that relates to a developer and, on the basis of where property values now stand, the legislation makes provision for the holding of assets to get long-term economic value for the benefit of the taxpayer. If that developer has other assets outside those that have been taken across to which recourse could ultimately be made——
Recourse could be made to those assets.
It could not because until such time as one sells the security that has been taken across, one cannot identify the discrepancy between the moneys recovered in respect of the loan and the additional sum due. There is an inherent contradiction between the suggestion that those who owe the money will be required to pay it within a relatively short period and the time between when we take over the loan book and the secured assets. We may need to hold the secured assets, meaning that we cannot realise them for a period of years. If they are unrealised then one will not have identified the difference between what has been received in respect of the loan and what additionals may be due.
That is true but of course one is dealing here with enforcement cases and one is looking at what is acquired in the course of receivership, liquidation or whatever. There may be cases where it is not feasible at the time to realise that asset but it will have a reasonable value over time.
Unless it is realised one cannot recoup additional debt outside it.
No, but the terms of the loan agreement will determine whether it is a simple debt or the recourse is limited to the asset. This is an issue which will have to be part of the valuation process.
One could have secured assets without a limited recourse. Normally, if the security does not realise in full the sum that is due, and if one is an ordinary individual, one would be sued for that.
Yes.
However, one cannot be until such time as one realises the asset. If the asset is held long term, for up to seven or eight years——
One cannot value the asset. That is why we have included provision for the vesting orders in the legislation. The court can vest and establish the value.
Will that identify value?
Yes. I am sorry I was not quicker to respond to the query.
Yes. That is what I was trying to establish.
The vesting order procedure allows NAMA to apply to the court to value——
At that stage it is the court that fixes the value.
The court fixes a value and at least it is a value for the purposes of subsequent enforcement.
Is the court entitled to identify what NAMA attributes in those circumstances to being the long-term economic value or must the court apply current market value?
No, because it is the original loan. It will have to value the underlying security at a sale price. Obviously there may be an issue down the road of indemnification.
If the bank is being rewarded with long-term economic value, I can envisage many developers arguing that they should be given the same recourse.
No, and the legislation does not provide for that.
Is the Minister satisfied there is protection within the legislation against that?
Yes. We will undoubtedly revisit that issue but that is the intention of the legislation.
There were several questions from Senator MacSharry.
I will come back to the Senator's questions.
Syndicated loans were mentioned by Deputy Shatter as well. Clearly, we must work with the non-covered institutions. This is one of the key issues. NAMA must be a single agency because of the syndication of some of the bigger debt. Regarding borrowers who are in debt and arrears of mortgages, clearly there cannot be a position, and in practice there will not be a position, where they are treated less favourably. Indulgence and compromise can be exercised there as well, and commonly are. I agree that this is something we must examine as matters evolve. There are public interest directors in all the guaranteed institutions and, in fact, our big difficulty has been not with the externally owned institutions but with a tiny minority of institutions which were essentially engaged in sub-prime mortgage lending.
They are the ones that have secured the majority of repossession orders in the past 12 months.
We have extended the code of practice, which was accepted by the other institutions, to them. On a threat of legislation it has been accepted voluntarily.
As everybody else was asked to do, I wish to make my declaration of interest. It is as lodged in the House and nothing has changed, although sadly everything is probably worth less. To take Deputy Fahey's approach, I am happily in the position that I do not believe I will ever become a subject of interest to NAMA.
Senator MacSharry referred to mechanisms to cover potential loss. The Government is examining this issue. Deputy O'Donnell referred to this earlier, and I did not reply to the specific point. He referred to a risk-sharing mechanism involving the allocation of shares in NAMA to the bank, so the bank could have the upswing in NAMA but equally be affected by the downturn. One of the difficulties with that is that shareholdings are valued on a mark to market basis because of their speculative character. That would mean that their value on the bank's balance sheet would be nil, which would make them a rather unacceptable form of payment in the context of this operation. However, we are examining a number of potential mechanisms that can achieve the same result.
Another point that has arisen frequently in the public debate is that somehow a developer who owed money could buy assets at a discount and start off in business again. If I was advising NAMA, the first thing I would do if a developer bought my assets would be to take the money off him and immediately execute a mortgage against the property, sell it and repossess it. I suspect there might not be many developers interested in doing this. I suspect that developers in this position might flee the jurisdiction rather than buy assets which could be enforced by NAMA. It is an issue that could arise with overseas assets. It is an issue we have examined and directives will have to be given by the Minister on the matter. However, one must remember that, in effect, one is suspending the normal operation of the laws of bankruptcy here because one is effectively constraining these individuals from engaging in a particular business and, if they became a discharged bankrupt, they should be in a position to restart. That issue must be examined.
The Senator is concerned about service providers to NAMA but there are extensive conflict of interest provisions in the Bill.
What about the valuation department?
Mr. John Mulcahy
With regard to NAMA public procurement, sainthood is nearly necessary.
Perhaps Mr. Mulcahy will deal with the currency issue I raised in the context of long-term economic value.
Mr. John Mulcahy
I refer to the property drop. We have the best data for commercial property, although there are two independent indices, which happen to agree with each other. The commercial property market is probably down 50% while the UK market is down approximately 46% using exactly the same measure and methodology, which is interesting. Do not subpoena me on this but the same market in France and Germany has fallen by approximately 20%. Those markets are more opaque and they did not quite achieve the heights we did.
I did not make any allowance in the look-back for currency. One can argue two things reasonably positively. One is the lower the correction, the bigger the likelihood that the correction back will be steep as well. That does not always happen but it is more likely to happen. One gets a bigger bounce when one hits the bottom. In the UK market, it was expected to go to 50%. It looks like it is stabilising. The rate of decline has slowed and in the past month there seemed to be indications that values may have slightly improved.
It is significant because if the market takes the sentiment that there is an improvement, one seldom gets a double dip. People are fond of double dips and it is almost like they hope for them but there is not a double dip very often. Sentiment is important. There are quite a number of buyers in the UK but the sellers have held out. Although nominally values are 46% lower, the sellers are refusing to sell if they can hold on. Some of the retail insurance property funds by encashment have had to dump their assets against their will.
One could argue that being part of the euro is an advantage. To try to defend an Irish real estate market with an independent currency and a faltering property market would be a big ask.
I did not suggest we should do that. We should thank our lucky stars we are in the euro.
Mr. John Mulcahy
I agree. The euro presence is a positive feature. Property is only a way to participate in the welfare of the economy and one has to have a recovery in the economy and then a recovery in employment, as mentioned by the Deputy. It eventually feeds through to a sustainable property market, which is a by-product.
I thank the Minister for attending, as this is a valuable exercise. What he has done is helpful and I agree with some of what he said. He is correct that this is not a bailout for the builders. It is a bailout for the bankers and we should not get the two issues confused. He is also correct that it is important we are not seen to default on bondholders, as it would send a message that we would default in other areas and that would put the nation at risk.
I thank the Minister for bringing along Mr. Mulcahy, although, on the basis of his comments, I am becoming more convinced that NAMA is nothing but a massive gamble. I say that because we are getting into a mindset, which is coming from the establishment on this meeting's platform, that prices will rise. There is an assumption in the NAMA project that prices will rise in the short term. I do not know where anyone got that idea. Does Mr. Mulcahy have a plan B? What happens if prices do not rise? We are talking about long-term economic value. That is code for the percentage rise in prices we expect to see in the next seven years. What happens if property prices fall in the next seven years? I do not find arguments about double dips and what happened in the property market historically, convincing. This is a completely new situation. As everyone acknowledges, we have never had a slump like this in the history of the State. There is no reason to believe prices will recover in the short term, that is the next five to seven years.
I congratulate Mr. Mulcahy on being a bear in the market. I hesitate to suggest that was a planted question. I am sure it was not. However, it was a convenient question at the time.
I never saw the man before today.
I did not ask Deputy Fahey if he had seen him.
Did Mr. Mulcahy say, as I have seen him quoted---
Senator Ross, you should address your questions to the Minister.
May I ask Mr. Mulcahy a question through the Minister?
Chairman, may I make a point? I am the responsible Minister. I asked for technical assistance from witnesses but not under direct questioning. There is a mixed question of policy in Senator Ross's questions.
In that case, may I ask the Minister a question? Did Mr. Mulcahy say, in UCD in 2006, "When government intervenes in the property market, or in any other market for that matter, the issue is not what good it will do but, rather, how much harm it will do before the intervention is reversed". That is a relevant question and it is important to know if Mr. Mulcahy still believes that, or was the observation appropriate for the time but not at present.
What is an independent valuer? Will we be going back to the same old estate agents and auctioneering firms who have been hyping the property market for several years by saying it was undervalued? Only the banks matched them for puffing the market. Will we go back to these same people, with the same interest, who will give us the high valuation which everyone wants? They will give inflated valuations which will do no service whatsoever. Will we get firms who have no vested interest in seeing the Irish property market exaggerated? We have had this problem before and it seems to me---
Senator, we are running out of time.
I have one more question.
You will not get an answer if you keep talking. It is as simple as that.
The bonds being issued by the Government to the banks may sit on the banks' balance sheets or may be used to go the European Central Bank. Can these bonds be traded in the markets? Will we be able to see the value of them floating in the markets and will they be traded like any other bonds?
Yes, absolutely.
I must declare an interest.
I apologise. I should have told the committee I am also a shareholder in Bank of Ireland.
I have no vested interest whatsoever in any of the banks, but I do have an interest as a taxpayer, a representative of taxpayers and a parent of children who do not want to be lumbered with this if it goes wrong.
I would like clarification on a number of points. The Minister referred to the narrowing of the bond yields, which has happened in relation to Ireland, as some kind of approval by the financial markets following the publication of the draft legislation. Will the Minister not accept that this narrowing has been in place since January and that the yields were narrowing anyway?
The Minister has given the impression that the European Central Bank has approved the establishment of NAMA. However, he has stated today that he has just received its first formal opinion. Does he accept that he may have gilded the lily in terms of the ECB's approval of the NAMA proposal so far, given that it is only in gestation?
The Minister spoke of NAMA in terms of getting lending growing again, which is obviously what we all want. I wonder if he has received from the banks any guarantees in terms of what they will do as regards lending. Will they encourage it? Has the Minister any lien on the banks? On that front, I note that when the €440 million guarantee was provided in September last year, following subsequent debate with the banks, they gave a commitment that they would increase mortgage lending by 30% and business lending by 30%. I note, however, that the figures we have received today show that mortgage lending has decreased month after month, thus illustrating that the banks are not living up to their commitment in that regard. I am interested to hear if the Minister has obtained any guarantee from the banks in their ensuring a flow of credit and whether he accepts these guarantees.
The point of this is to allow NAMA to hold the assets in order that they will not have to have a fire sale type price. Does the Minister have any idea of how long the assets will be held for and who will decide when they will be sold? Also, does he agree that holding the assets does not cost us because we have to fund the yield from the bonds? If we hold them for one, two or five years, a certain cost will apply and somehow this must be built into the price that will be paid to the banks. What is the Minister's prognosis of for how long that funding will be required? For how long will NAMA operate?
I share some of the concerns expressed by Senator Ross about the valuers. Who are they? How exactly will they determine the values and, in particular, when will they value the assets? Will this be done on day one, in year one or year two? When will it be done? It is critical in terms of how the banks behave and whether they will require further investment.
On valuation, I note the Minister has referred to three valuation methods — the red book, the European valuation method and the international valuation method. The difficulty which many will have lies in what it means if one provides three valuation methods. How are we valuing assets? Is it the case that the red book method will provide one valuation, the European valuation method a different one and the international valuation method a further one, which will lead to all sorts of difficulties in justifying prices?
The issue of the long-term economic value of loans is the heart of the debate. The Minister states past values will be examined. I know that the intention is to take away the most recent valuations in looking at past prices. However, how long a period are we talking about? Is it 40 years, the previous seven years——
We have data dating back to the early 1970s.
Yes, but are we going to use it all or only some of it?
The Minister states it is expected NAMA will make financial gains over the course of its life. The difficulty is if it is expected to make gains over the course of its life, an issue arises in terms of valuations in that one is expecting something in relation to what will be paid and also has an expectation in terms of how long NAMA will be operational. For how long will it be in operation? I know there is no answer yet in terms of the amount to be paid and that the Minister is hopeful it will ultimately make a gain.
My final question relates to what Mr. Mulcahy had to say. I accept he is trying to give us the benefit of his analysis and experience. He said that traditionally there was a recovery in markets after a number of years. The reality is that one cannot have recovery in any market unless lending resumes. There is a huge chicken and egg element to it. The prices and valuations which the valuers will make up will be based on the assumption that the banks will bounce back to recovery. That is what it is all about. Which comes first — the bounce back to recovery or the expectation of the valuations that the valuers will put in place? It comes back to what Senator Ross has said. This is an enormous gamble. The Minister is asking us to trust valuers who, in most people's eyes, have got it completely wrong over the past seven years. I am not speaking about Mr. Mulcahy. We are supposed to believe these people will get it right in the years ahead.
I would like to ask one more question.
The Minister has to leave.
I will take Deputy Rabbitte's question, as long as this is the conclusion. I am tight on time.
I would like to address an issue that was touched on by Senator Quinn. It has been widely reported outside here that the Minister is minded to be positive about what has become known as the Honohan amendment. I did not hear what he said to Senator Quinn. I have not seen any statement from the Minister that suggests he supports the Honohan amendment. I would like to hear the Minister's thoughts on the matter. Under the EU framework, how frequently are we required to report to the Union on performance, and so on?
Does the Deputy refer to the general performance of the economy?
I refer to the performance of NAMA.
I will begin by answering Senator Ross's questions. The Senator welcomed certain features of this proposal. However, he raised the question of what will happen if property prices fall over the next seven years. He developed his argument on that point. It seems to me that one needs to analyse the marketplace. That is why we are employing the services of Mr. Mulcahy. At present, the yields to property are way ahead of the average long-term yield. That is not consistent with the Senator's prognosis that property will continue to fall.
I did not say that. I said I do not know, whereas the Minister seems to know it will rise.
I am not saying we know, but we have to make an intelligent estimate.
It is pure gambling.
There is a difference between intelligent estimation and pure gambling. We are engaged in intelligent estimation.
I thought spread betting was intelligent estimation.
I do not engage in betting. The Deputy will have to tell me more about spread betting. We are dealing in the financial markets, as the committee is aware. The question of the independence of the valuation was also raised. Mr. Mulcahy outlined the safeguards that will apply to the practices in that regard. It is important that the practices in question are observed. I will ask Mr. Mulcahy to deal with the bulk of Senator Ross's points. The Senator really wanted to question him. While I am politically responsible, many of the Senator's questions were technical in nature.
Clearly, it is vital that valuations are not exaggerated. The bonds on the paper can be traded on the world markets or presented at the European Central Bank. One of the advantages of our participation in the eurozone is that the European Central Bank is prepared to honour this paper. This whole operation would be impossible if Ireland were a small country with an isolated currency. If we were not involved in the euro system, we would be looking at some of the scenarios which have been canvassed on some of the wilder shores of economic opinion in recent weeks. This operation is designed to be consistent with the European system.
Deputy Lee asked whether I was gilding the lily with my comments about the European Central Bank. Before I made my budgetary announcement in April, I had to take soundings from the European Central Bank. I would not have been in a position to make the statement I made in my supplementary budget — that we would go down this road — without the support of the European Central Bank for the broad direction we are taking in this instance. Of course the European Central Bank cannot and should not be involved in the detail of this proposal. It is a matter for us as we exercise our responsibilities. However, the bank has expressed an opinion about certain matters. It states, for example, that we should be very cautious about employing long-term economic value. I agree with that view.
Has the ECB approved NAMA?
It has not approved NAMA in the sense of approving every last detail. When this matter was examined by the Government and the various options were canvassed by Mr. Peter Bacon the options involved were to follow the British route of risk assurance or do an asset release through a holding company exercise such as the NAMA proposal.
My comments are not made out of disrespect to the Fine Gael Party or the Labour Party. The latter has advanced the nationalisation argument, an important argument in the debate which has to be addressed and discussed, while the former has advanced various ideas which we can examine further to ascertain if they can be incorporated as features. However, even if one nationalises the banks, one will still need a national asset management agency because the problem is that one has cross-collateralisation throughout the system. Even if one were to put all the banks in public ownership — I have indicated the reason I do not want to put them fully in public ownership but stated that we are open to taking majority stakes — we would still have a NAMA type agency to complement public ownership. Otherwise, the position of the nationalised banks would not be different from the position of the banks at present. There would simply be a change of ownership, rather than a change of function in terms of their attractiveness to world markets to raise funds and the condition of their balance sheet.
Likewise, in the case of the Fine Gael proposal, while I see the motivation is to stimulate credit in the economy, which is fundamental, it is difficult to see how one stimulates credit in a banking system which is so dependent on external funding without creating confidence that one has a viable, strategic plan to sort out the problems in the system.
It would be tremendous if a new bank were to set up here tomorrow morning. While the capital could be provided easily, the logistics of assembling such a bank and turning it into a mass lending agency in the short period envisaged in the Fine Gael proposal are very difficult. I have said, however, that I will examine the proposal and we will see what can be done. I indicated on the wider issue of what Fine Gael is proposing after the guarantee, that while it would be very attractive to do what is proposed, it cannot be done because of the scale of the banking crisis that has taken place here. These issues can be examined.
The support of the European Central Bank and its constructive engagement are fundamental to this operation and the signs in this regard have been positive from the start. Central bankers are cautious and do not stamp approval on every last detail of any proposal. We will work constructively with the ECB to resolve and address the issues it has raised it the latest paper.
The impression was given that not only had the European Central Bank approved the proposal but the International Monetary Fund had also done so. Surely, the answer in relation to the IMF must be the same.
The approval of the IMF has been far stronger. I met the IMF delegation and its report made clear that NAMA has the potential to address our banking difficulties. The IMF referred to nationalisation, but as a consequence of the losses the banks must take, not as a pre-emptive nationalisation. I discussed matters with the delegation in great detail.
Nationalisation is a parallel process.
That is correct — a consequence would be in parallel. However, a key point is that the IMF also raised the issue of broadening the asset classes and stated it would give more confidence if the Government made clear that these would be covered. The degree of impairment, however, is such that on the basis of the stress testing of the two major banks we do not believe this will be required.
Ultimately, it boils down to whether the long-term economic value is a realistic assessment or a throw of the dice in which one hopes one gets it right.
The realism of the assessment has to turn on the absolute amount one allows. It can only be allowed as a fraction of the market price. The European Union rules are very insistent that there is a very definite limitation on the amount of that which can be permitted.
It may have to go beyond the market price.
Yes, the statutory formula recognises that, as it must do, but there is a limited extent to which one can go beyond the market price.
Will it be spelled out in regulations?
The valuation formula will be spelled out in the regulations and the actual estimated amount will be provided in the speech I will give on 16 September.
Will the amount be stated in the Bill?
No, we will publish the draft regulations on the same day.
I understand the Minister must leave at 6.30 p.m.
Deputy Lee referred to the narrowing of the bond spreads. They were at 1.5% at the beginning of the year. They went up to 3% after the nationalisation of Anglo Irish Bank. They have fallen to 1.5% again. We have substantial market information that much of that is as a result of the firm actions taken, both on the banking and public finances front. That is what the NTMA is telling us.
I can assure Fine Gael that the bond spreads widened marginally this week, but I am not suggesting it is as a result of the controversy over default. The market information suggests that there are other reasons this is happening, which are unconnected with Government policy. I am not suggesting that Fine Gael caused a widening of the bond spreads this week, although there has been a small widening. The journalist in the Sunday Tribune who said he did not believe that anything we say will have any effect on bond spreads has happily been proved right this week. However, it is an important issue.
Deputy Lee asked about the duration of NAMA. Given that we are going to hold the assets and there will be no immediate firesale of certain assets, he wanted to know who decides the cost in building up the liabilities. The creation of NAMA itself creates huge refinancing operations for NAMA, so it may be possible to dispose of the book far more quickly than the long period of time which people seem to contemplate in the context of illiquid assets. The creation of NAMA permits the investment in the agency by way of equity or other forms of investment which will allow the State immediately to realise the assets and to minimise the risk to the taxpayer of the whole operation.
Therefore, they will be sold on.
Yes. The risk to the taxpayer must be broken down into different risks. There is a risk that there will be a continued depreciation of property, as Senator Ross suggests. If that risk materialises, then there are severe economic and banking problems for Ireland, irrespective of what is being done. There is then a risk that the taxpayer, in pricing the assets, will give an unintended bounty to bank shareholders. That risk will be reduced to some extent by the degree of public ownership of the institutions. We have already arrived at a position in Anglo Irish Bank where we have a 100% guarantee against that risk, as we own the institution. However, in the other institutions, this stands at 25% at the moment. For the remaining shareholding in the sector, there is a question as to whether we can minimise the risk further by some risk sharing arrangement, but there is a limit to that operation, because the whole objective is to have clean banks that can lend into the economy. A final important risk is the risk that NAMA will not do its job properly. It is essential that NAMA performs its jobs correctly and commercially, and is incentivised to do its job correctly.
At the debate that took place at the Committee of Public Accounts, Dr. Michael Somers voiced the concern that we would end up setting up a huge bureaucracy, similar to what happened in the US during the Savings & Loan crisis, and that we could have a huge semi-State operation managing all of this. We have gone a different route involving a very tight administration, but that involves outsourcing much of the work. The question arises how to incentivise the performance of both NAMA and the outsourcing agencies. It is clear from international experience that this operation can be done and has been done when countries faced similar challenges, even though the challenge facing Ireland is very big. We must attend especially to the issue of incentivising those involved to maximise the return to the taxpayer through a proper commercial management of the entity.
Deputy Rabbitte asked about the Honohan proposal. I am examining this proposal. The one difficulty with it is that it is formulated in technical terms of shareholdings. Were we to use the shareholding device to implement the proposal, a problem would be created because the shares would be marked to market at nil on the banks' balance sheet after they were issued. However, the issue is under examination by the Government.
Has the Minister any answer on how to guarantee that the banks will begin to lend?
I dealt with that when I replied to Deputy O'Donnell. The key issue in getting the banks to lend is to get their balance sheets into order. It is as basic as that.
I refer to what already has been promised in respect of lending.
I meant to mention that this has been monitored in respect of the two capitalised banks, which have complied with their obligations to date.
As the joint committee has other business to attend to before 7 p.m., I thank the Minister and his colleagues, members of the joint committee, as well as those who are not members but who contributed, for the contributions this afternoon. I also thank the Minister for his comprehensive and wide-ranging replies.
Sitting suspended at 6.35 p.m. and resumed in private session at 6.40 p.m. The joint committee adjourned at 6.45 p.m.sine die.