David McWilliams - NAMA money pit could be our economic Stalingrad

cdb

Interesting article in yesterdays independent from David McWilliams.

Full article here: http://www.independent.ie/opinion/columnists/david-mcwilliams/nama-money-pit-could-be-our-economic-stalingrad-1875206.html

The collapse in property values, the fact that the market here is in free-fall and developers and banks are bankrupt presents the single biggest opportunity this country has had in a generation.
With so much prime land now available to the State for a song, the obvious thing is for the State to profit from the bankers' and developers' stupidity and greed by buying the land for next to nothing and then putting it to public use.
This will mean the orderly winding down of some banks over the course of the next year. In almost every banking disaster we have seen in the past two decades, the obvious thing to do is let banks go. The State guarantees deposits, transfers these deposits to a new bank and the economy starts again. From the Swedish crisis of the early 1990s to the Asian Tiger collapse and the USA today, banks go bust and the countries recover.
The banking system and the economy are not the same. Our government has migrated from a logical position of trying to save what looked like it might possibly be a good banking system, to trying to preserve what we know to be a bad banking system. This makes no sense and, more crucially, investors don't like what they see. Investors want to share in success not be party to a policy which is neither credible economically nor clever financially. It is for this reason that no institution bar the ECB will touch the NAMA bonds.
Before I explain why letting a bank go will encourage money to flow into the country (rather than flow out of the country as the Government seems to think), let's appreciate why this is an opportunity, not a crisis.
Potentially, this could be a one-off windfall gain for the people and the first step towards economic recovery. Yet for some reason, instead of raising a bond to buy cheap land at this once-in-a-generation fire- sale price, the State wants to protect the people who got us into this mess so they can hold on to some gains in the chaos.
Where is this analysis coming from? Think about it, in the boom we couldn't build infrastructure at a decent price because the price of land was artificially inflated. So the people transferred billions of euros to landowners and developers to allow us to build bridges, schools and roads on hugely expensive land. In effect, this was a tax on the average person to subsidise the very rich.
Now the opposite is the case. We can subsidise the poor by taking the land back now. But instead of seizing the opportunity to buy this land for the State's use for the next generation, we are being asked to put the interests of the corrupt, greedy and plainly stupid bankers over the interests of the average citizen.
We are being asked to stump up for NAMA based on the reasoning that if we don't do this then investors will flee the country. This line is hilarious for anyone who has worked in international finance during a banking crisis; it implies that international investors are prepared to risk their money in a country that is being turned into a large debt-servicing agency for old debts.
One of the most depressing aspects of the present policy disaster is that people who are constructing it have clearly no idea how traders or the financial markets think. It is policy framed by civil servants and lawyers, not by traders and as such it scares proper investors who might be willing to take a punt on Ireland. At the moment the place doesn't seem safe because the State is trying to prevent the inevitable and as long as it does this, money will stay on the sidelines. (The promises made in the good times look silly now when everything has changed and trying to keep them looks incredible.)
In every episode of debt-induced crises, governments break promises made in the boom and the simple reason is that is what they have to do. They don't have the money and they are not prepared to put the interests of investors above the people.
Most proper investors realise this, which is why money flooded back into Sweden after it let a bank go bust. It is why money flooded back into Finland, the US and Ireland (in 1993) after we broke our promises to bond and currency investors and devalued our currencies. Likewise, in the Asian crisis, investors took their losses on banks and moved on.
When investing, you take the rough with the smooth. You win some you lose some and only the naive believe that they will never make a loss. Having worked in international banking in various countries which experienced banking crisis throughout the late 1990s and early 2000s, I know that no country reacted as we have.
Our desire to protect all bank investors is the behaviour of fanatics. By this I mean that trying to pretend we have the money and the resources to bail out the banks when we do not is the economics of Stalingrad. We are trying to throw everything we have into the banks, exhausting our resources in the process. When investors see that we are being ruled by financial fanatics, they stay miles away because they know investing is pointless.
Inexplicably, NAMA is our economic Stalingrad and it scares all sensible people. It is based on the "big lie" that to lose here would spell disaster. In fact, the opposite is the case. Why wouldn't you want to invest in Ireland once the banks are wound down? You get a smart population, that isn't being mortgaged for the mistakes of the few.
The reason we must fight NAMA at every turn is because it is the economics of fanatics and the whole world can see this. It will keep money away from the country, not the other way around.
- www.davidmcwilliams.ie

DublinWriter

Excellent analysis.

Personally, everyday the UK is looking like a more attractive place to live. Ireland is falling apart in front of our very eyes.

Our education and healthcare systems are so seriously underfunded, and continued to be so even during our boom years. Now suddenly tens of billions is available to bail out bankers and developers?

Something is very rotten in the state of Ireland.

kmick

Agree with most of what he says but NAMA is a done deal. I think if they buy at 25% discount and we build in the fact that the entitiy that took out the loan had to put up 25% then we buy at a 50% discount. At that level we should be ok. However I have no confidence in any government to get the best price for this land when they sell it back. It will go to the same people that lost it in the first place at a discount on what the government paid for it. Shambles, shambles, shambles.

Diarmuid

kmick wrote: »

Agree with most of what he says but NAMA is a done deal. I think if they buy at 25% discount and we build in the fact that the entitiy that took out the loan had to put up 25% then we buy at a 50% discount.

You're assuming that the 25% they put up was their own hard cash. Do you think there was €30bn in cash involved in these deals? Highly unlikely. Mostly likely it was leveraged. This 60/90/120bn carry on is obfuscation, an accounting trick to further muddy the waters.

leonardjos

Agree with most of what he says but NAMA is a done deal.

NAMA is not a done deal by any means. The government task of passing the NAMA legislation through the Dail is looking more and more precarious. Just look at the commentary in the media which is getting more and more heated in its anti-NAMA message. Look at the record low government approval ratings in this mornings opinon poll.

The Green party grassroots membership will put the final nail in NAMA's coffin in my opinion.

If for some inconceivable reason they dont, NAMA still faces a raft of challenges. For instance the President can opt to not sign the legislation and call a general election in such circumstances. Under the constitution, the President can do this if she feels the mandate of the government for the legislation is in doubt, and if the legislation is significant enough to warrant this action. Expect protests outside Áras an Uachtaráin if the legislation makes it that far.

You also have possible legal challenges including a constitutional challenge. There is also public opinion and protest marches to deal with. Fianna Fail also have to worry about Indepenents and backbench FF TDs deciding the jig is up and leaving the government. They would do this to curry favour with their electorate and to increase their political profile. They will start thinking about their own political future and will abandon the sinking ship of the current government.

bangersandmash

Diarmuid wrote: »

You're assuming that the 25% they put up was their own hard cash. Do you think there was €30bn in cash involved in these deals? Highly unlikely. Mostly likely it was leveraged. This 60/90/120bn carry on is obfuscation, an accounting trick to further muddy the waters.

Agreed. Brian Lenihan has already admitted that the collateral involved in some cases was pretty dubious.

Mr Lenihan said that some assets can only be valued at the market rate -- particularly if the collateral used to secure the loans has plunged. "Collateral may have been put up in terms of bank shares or race horses, etc," he said

optocynic

Sorry to take the crazy leftie approach here... but how do you evaluate the current market value of land in the middle of nowhere?

The market value is, in reality, nothing, since it can't be sold or given away.
Isn't this the real issue with the NAMA over-valuation issue?

I wonder what the 'market value' given to properties of FF campaign contributors will be?

Diarmuid

optocynic wrote: »

Isn't this the real issue with the NAMA over-valuation issue?

Yes. It's the major issue with it. (don't know what leftie or rightie has to do with that?)

optocynic

I was afraid that I may appear to be agreeing with our latest Robin Hood.... Eamon Gilmore!

kmick

leonardjos wrote: »

The Green party grassroots membership will put the final nail in NAMA's coffin in my opinion.

There is a history in this country of the opposition making a lot of noise and then voting it through virtually unopposed. The president stopping legislation would be unheard of - she is just a figurehead. I dont think the greens have the strength of character to oppose this in any meaningful way. They are going the way of the PD's after their miserable term in office. In the absence of an alternative I dont think this one will get a bullet in the head. Remember this one is Lenihans baby and he is the only one in FF who has shown any balls. His performance in front of that commitee the other day was very good*. He looks more like the leader of FF every day and you can see he aint taking no for an answer.

* And I am no fianna fail fan.

leninbenjamin

Good old McWilliams with his pop economics again. It's funny how through all his humorous analogies, he never actually suggests a viable solution to the problem.

MrMicra

As Fianna FAIL have imagined it (we all pay for the builders to be bailed out then the builders pay the politicians for the favour) NAMA is dead. The European Competetion Commissioner has published her guidelines on Asset Valuation in this situation and the valuations:
Must be transparent
Must be approved by the commission
Must have a clawback for the state if the state loses money

The purpose of NAMA is to overpay. We can no longer overpay. Game over.

If this is our Stalingrad are we the Red Army or the Wehrmacht (I think we should be told).

gurramok

leninbenjamin wrote: »

Good old McWilliams with his pop economics again. It's funny how through all his humorous analogies, he never actually suggests a viable solution to the problem.

He just did.

With so much prime land now available to the State for a song, the obvious thing is for the State to profit from the bankers' and developers' stupidity and greed by buying the land for next to nothing and then putting it to public use.
This will mean the orderly winding down of some banks over the course of the next year. In almost every banking disaster we have seen in the past two decades, the obvious thing to do is let banks go. The State guarantees deposits, transfers these deposits to a new bank and the economy starts again. From the Swedish crisis of the early 1990s to the Asian Tiger collapse and the USA today, banks go bust and the countries recover.

LostinBlanch

Gurramok, some people see exactly what they want to see.

Drumpot

Im am certainly worried about NAMA, but I am also worried about the far shift to the left that this country is taking. Eamon Gilemore has offered NOTHING . .Nothing but anti government sentiment. .His policies are based on whatever the opposite that FF are doing. Is it any wonder this country's in such a state when so many "sheep" will follow a completely visionless leader who simply tells them what they want to hear.?? It was done with Bertie, now Gilemore could be the next generation of leaders who offer more style (I use this term very very loosely) then substance.

Before I get called an FF sympathiser, I have very little confidence that the government understand all the complexities involved in this when the likes of our minister for Trade & Enterprise justifys NAMA as "allowing banks to perform as banks" (ie lend money again), by saying "sure how will banks make money if they dont lend". Im no economist, but this is shockingly ignorant assumption on how banks work. Banks get capital in this kind of crisis, they shut up shop and reduce their loan book as much as possible. This isnt rocket science .

I would prefer an open forum debate on the plusses and minus's of all the suggestions on the table and the possible ramifications of each decision made. .

That said, apparantley FF had given the opposition 3 days to discuss and make proposals on what they believe we should do and the opposition kept schtum.. This leads me to believe that while FF may have question marks over their "plan of action" , the opposition partys are simply playing to the crowds and throwing stones at something they arent trying to understand . .

Either way, I get the feeling that our taxpayers/voters/sheep will make the same mistakes, the blame the government (despite voting them in), Banks (despite being run by shareholders who did nothing when banks were milking the economy), builders/developers (dont blame them for govt bailing them out) and as a nation we will chase the same red herrings for the promises of personal wealth at the expense of the nations progression.

The people of this country (majority of voters) dont want change in our politics (why arent people marching over this expenses scandal!) . . They dont want our country running smoothly (there will be marches for any cuts in salarys) . . They dont want to face up to their own responsibilitys (If i buy a house and its in negative equity its the banks/governments fault etc) . . They dont want to accept any portion of blame for the mess of the country (I didnt vote in FF, but I did march when I was given some levy!!) . . They simply want somebody to tell them everything will be fine and that they have all the answers, without actually giving credible solutions (Gilemores Labour) . . That's understandable but is a very naieve way of voting . We need to demand and vote for the people who we believe wont tell us what we want to hear but will do the best job. It could be argued (again debatable but just making a point) that Brian Cowen is, as leader certainly, the anti Bertie. Hes not about looking good, hes just getting down to hard work and getting stuck in. If anything hes more about substance then style and its costing him dearly in the popularity stakes (which is more important to our electorate then qualifications)..

I really believe we can overcome this terrible crisis, but I believe as a nation we need to grow up, dismiss the self interested groups (Public service, private service, unions . . ), stop blaming others or making excuses and make a roadmap for the greater good of the country with long term aspirations to have an economy thats not over reliant on one sector. . Easier said then done, but I firmly believe that positive mental attitude and hard work can make hardships an easier pill to take . . I dont mind people suggesting otherwise or having differant views on topics, but I dont see what being negative/depressed or dismissive (without alternative suggestions) is going to do to help us overcome this trouble

Fratton Fred

optocynic wrote: »

Sorry to take the crazy leftie approach here... but how do you evaluate the current market value of land in the middle of nowhere?

The market value is, in reality, nothing, since it can't be sold or given away.
Isn't this the real issue with the NAMA over-valuation issue?

I wonder what the 'market value' given to properties of FF campaign contributors will be?

That's what i was trying to work out. some of these places, like the Tower in Sandyford, have not just dropped in value, they are worthless. In court it was stated that the developer owed €289m to Anglo irish and €22m to ACCBank but the remainimg properties that had been started were worth just €500k due to the fact that Sandyford has enough office space for the next ten years (I'm speaking from memory here so may not have the numbers correct).

What miracle is NAMA going to perform that will get any money back for this now? it is completely obsolete.

optocynic

That was my exact point. Surely paying even 25% of nothing is still nothing!
Maybe Mr. Lenihan has a cunning plan in the making here... pay sweet FA for the properties, build prisons on all the land for seriously low costs now that the builders are desperate... and put all the tax/work dodgers and welfare fraudsters in them!!!

Yippee!!!

However, I doubt it!