So where do all these fanciful figures come from?

Turning bank debt into equity will save us from Nama ruin - The Irish Times - Tue, Oct 13, 2009

First, the estimate that prices have fallen 47 per cent. The reality is that prices can only exist when there is a market, and the market for commercial property and development land has disappeared.

A less futile exercise is to ask how much Nama would have cost at the end of similar credit-fuelled price bubbles. A decade after their peaks, Tokyo land prices had fallen by five-sixths, while Irish farmland, adjusted for inflation, had fallen by three-quarters. Had Brian Lenihan bought €77 billion of either, applying the proposed Nama discount of 30 per cent, he would have lost €35 billion-€40 billion on our behalf, or roughly €20,000 per taxpayer, and that is before adding interest.

At a quarter of national income, Nama would dwarf the cost of previous bank bailouts, which varied from about 3 per cent of GDP in Sweden to 14 per cent in Finland and Japan.

Most baffling of all the Nama numbers is the proposed discount of 30 per cent, implying that the "long-term economic value" of property is at 2004 prices. Not one shred of evidence is offered for this assertion, the keystone of the Government's strategy.

At first, I thought that this mystical 30 per cent number embodied Fianna Fáil nostalgia for a vanished era of innocent greed; a hope that we would wake up one morning and find ourselves back in 2004 forever, basking in the benevolent gaze of Bertie Ahern and Seán FitzPatrick. The reality turns out to be a lot more mundane. The EU simply forbade Lenihan to pay any more. This is not through any dismay at seeing Irish taxpayers fleeced by their Government, but for fear that they will be stiffed into carrying out an Iceland-style rescue here.

The figure of a 77 per cent loan-to-value ratio is equally fanciful. It will take years for the courts and Fraud Squad to disentangle multiple personal guarantees and imaginary collateral. The situation in Anglo Irish Bank appears particularly grave.

Finally, there is the assumption that the Irish Government can continue to borrow forever at low rates from the European Central Bank. However, the ECB is making no secret of its dismay at being turned into a credit union for feckless Micks, and is anxious to end such emergency lending facilities within the next year.

Once the ECB slams the window on its fingers, the Government will be forced to borrow at market rates of 5 per cent or more. In the next decade, this will add another €25 billion or so to taxpayers' losses from Nama.

So what are the likely consequences of Nama?

Turning bank debt into equity will save us from Nama ruin - The Irish Times - Tue, Oct 13, 2009

As well as being expensive, history shows Nama-style bad banks to be profoundly corrupt and corrupting institutions. After the financial crisis in 1931, the US, Germany and Austria all set up bad banks which turned into conduits for directing funds to politically connected enterprises.

Bad banks are the means for governments to choose which oligarchs will survive to emerge even stronger than before. They do not just happen to behave in a corrupt and anti-democratic manner: it is what they are designed to do.

And do not forget that, even after the crushing expense of Nama, Irish banks will still be seriously short of capital. Under the current, deliberately lax, international bank regulations, AIB and Bank of Ireland need capital of around €8.5 billion.

Financial markets, which assume that Nama will go through, value their existing capital at around €3 billion, and adding Government preference shares of €3.5 billion leaves them short about €2 billion each. Once stricter capital requirements are imposed next year (the so-called Basel 3 process), this shortfall will probably rise to €6 billion.

So what is the alternative?

Turning bank debt into equity will save us from Nama ruin - The Irish Times - Tue, Oct 13, 2009

Nama then, will turn out to be expensive, corrupting, and inadequate. While the abject, almost endearing, eagerness of the Greens to please their Fianna Fáil masters means Nama is almost certain to go ahead, it is perhaps worth asking what would happen if it did not.

All that needs to be done is for ownership of Irish banks to be transferred to their bondholders. This process of converting debt into equity occurs sufficiently often in banking to have a name: resolution. Resolution offers a way for Irish banks to be adequately recapitalised at no cost to the taxpayer, and able to manage their business without political interference.

Under existing Irish corporate law, this transfer would be a recipe for centuries of litigation. That is why most other industrialised economies have, or are introducing, special legislation to resolve failing banks with limited judicial review. Particularly impressive is the UK's Special Resolution Regime introduced last February, which could easily serve as a template for similar legistlation here.

Instead we will get Nama. Brian Lenihan assures us that Fianna Fáil's monument to a decade of waste, corruption, and ultimate ruin will not be wasteful, corrupt, and ultimately ruinous.

Let us hope that, for once, he is not wrong.

The sell-out of the Greens on Nama is perhaps the saddest political facet of the current débâcle.  They currently hold the balance of power in Ireland, and could probably have named almost any price:  such was the desperation of Fianna Fail to avoid an election and the annihilation that was sure to follow.

For a few paltry and temporary concessions on Mink fur farming, ending stag hunting, and rolling back some education cutbacks they have thrown their lot in with Fianna Fail for the remainder of this Government's term of Office.  I will do a more considered analysis of the revised programme of Government when I can find the heart to do it.

However the sell out of the country that is Nama promises to have a far more long term and devastating effect.  God may have made economists for some good reason, but unfortunately in Ireland they haven't had much influence until it is far too late.  Too many were cheerleaders for the economic boom when the bubble was growing ever bigger for them to have much credibility now.  Let us hope that they are just as wrong now on the downside.  Certainly Morgan Kelly's analysis of Nama is hard to gainsay.