Madam President – Nama is Unconstitutional

By Albert Byrne | April 23, 2019

Madam President – Nama is Unconstitutional

26th September 2009

Madam President,

I would like to draw your attention to the NAMA legislation and why I believe it is repugnant to the constitution and as such, under article 15.4 of the constitution, should be referred to the Supreme Court to test its constitutionality.

According to a report by Davy Research (July 2009) net government debt stood at €41.8bn year ending 2008 (excluding €3bn to recapitalise Anglo Irish). It anticipates a total of €19bn will be required to recapitalise the banks. Of this €14.7bn is expected to come from the state with the remainder coming from the banks themselves. The minister of finance estimates NAMA will cost €54bn where the book loan value is €68bn + €9bn of unpaid interest, i.e., €77bn. Recapitalisation of the banks & NAMA will therefore add a further €68.7bn (which includes €2.7bn risk share) to government debt. Of the €77bn in loans, €28 billion are held by Anglo Irish Bank who classifies just 11% of its loan book as business banking (Fintan O’Toole, Irish Times).

Davy research argues that net debt will be less given NAMA’s asset values. However, if the real value of NAMA’s assets are closer to those assigned to the Zoe Group in the recent High Court action (approximately 25%), it is difficult to see how any developer would be able to continue making payments on property whose real value is significantly less than the outstanding debt – in some cases a 10th of the original valuation. A conservative estimate by Richard Curran, Sunday Business Post, places NAMA’s portfolio at 45% of its peak value based on worldwide property valuations, i.e., €39.2bn of an €88.3bn total using a LTV of 77%, making default &/or special discounts for borrowers a more likely prospect. The minister Brian Lenihan stated on the Pat Kenny Frontline show that the banks would be paid less if valuations were less. However this is incompatible with keeping the banks solvent without more costly state funding, which the government has stated it will do if necessary and all the signs are it will be necessary. In addition, the Construction Industry Federation chairman Tom Parlon has stated that the additional €5bn the government is to make available to complete projects is not nearly enough.

If the government does decide to hold onto these assets to recoup its losses, rather than subsidise developers by way of fire sale auctions or otherwise, an average interest payment of 4.2% will have to be paid to the ECB over the next 10 years, as pointed out by Richard Bruton, based on the projected average 10 year ECB base rate of 3.8% where the government is liable for 0.5% above this, i.e., a potential total of €32bn. In addition, Justice Frank Clarke in his judgement against Zoe Group stated there is considerable downside risk to property prices for the next 2 years. Given, for example, that Dundalk has sufficient zoned land to last until 2073 NAMA values will fall even further as land is rezoned to agricultural use. According to Morgan Kelly, economist UCD, Ireland’s property bubble is remarkably similar to Japan’s where, almost 20 years later, prices are still 50% below peak levels. The government’s assertion that the market is bottoming out and showing signs of recovery based on higher property yields is flawed as rents are being propped up by legislation and eventually those yields could fall to zero as businesses go bust (David Fitzsimons, CEO Retail Excellence Ireland). As stated by Ronan Lyons, Irish Times: “It is scarcely credible that Nama’s entire estimation of long-term value hinges on rents, despite evidence to the contrary, holding constant in a subset of the total loan book – a segment that accounts for perhaps 5 per cent of the loan book in total.” Chief economist Alan McQuaid in Bloxham’s third quarter Irish Economic Overview said the property market will only stabilise when the labour market does and warns of thousands of further job losses before the middle of next year. He believes the fall will continue for some time yet (The Post). Presumably, this will affect NAMA’s development project loan values aside from landbanks & associated loans (mainly commercial properties), the other 2 segments of NAMA’s loan book.

If the government does not make deals with developers we are left with Catch-22. Either the state sells off the assets at a huge loss to the tax payer or else they hang on to the properties in the hope, however speculative or unlikely, that values will recover whilst huge amounts of interest are paid. It seems inevitable further borrowing will be required even allowing for 40% of loans which are “performing.” Additionally, the so called risk share of €2.7bn to be paid if NAMA turns a profit is a double edged sword. If NAMA does not turn a profit this implies the banks will also be in trouble and may require further bailing out. In all of this no account is being made of the assets which have been used to secure the original loans, many of which are based on overvalued property and secondary bank loans. Neither does it take into account the enormous running costs which will be incurred by NAMA. The fact that NAMA is already beginning to resemble the tribunals in terms of consultancy costs (€2K+/day) does not bode well for its future (Daniel McConnell, Sunday Independent). Further, the proposed levy on banks (which may be a drop in the ocean) in the event of significant loses may be difficult to impose as banks could also be in trouble and will resist any attack on their funds pointing, for example, to any special arrangements made by NAMA as a cause of lost revenue and therefore not of their doing. Meanwhile the Supreme Court has expressed concern that the Zoe Groups’s continuous appeals, which now run into November when NAMA will be in place, are seriously affecting the courts resources and an appeal has been made against Zoe Group by ACC Group on the grounds that it is abusing the legal system (Irish Times).

The ECB has stated that the government should not pay more than the actual value of the assets and has warned against the danger of banks using the monies they are paid to rebuild their equity rather than lend to new and existing customers. At the same time the IMF has stated that secret entities (which NAMA is) have less chance of success. A lack of transparency is at the heart of Ireland’s political problems and could be costing the economy up to €3bn per annum in lost revenue and foreign investment due to political influence that stems from political funding that is unlawful (Transparency International Report 2009). Such influence, no doubt, is not unrelated to the non-transparency which contributed to the collapse of Anglo Irish.

The question the people are asking is: why are we not following due process and implementing a strategy that protects the tax payer’s while managing government debt, instead of passing secret & complex legislation designed to use tax payer’s money to cover private investor’s losses? The reality is: billions of euros spent on NAMA & recapitalising the banks will go straight into the pockets of investors & borrowers who by due process are entitled to very little. Before NAMA officials were silenced they spoke of their concerns at its complexity and their lack of experience. Department of Finance officials have said that the NAMA scheme will be among the most complex plans ever introduced by government (Irish Times).

Sweden exited its banking crisis by following due process: shareholders paid first. As the former conservative Swedish finance minister Bo Lundgren pointed out on Good Morning Ireland, Sept. 3rd, the Irish economy is strong on the baseline and private investors will return once recovery begins. Many other strategies exist to protect the taxpayer which the government have resolutely rejected & ignored from day one insisting that NAMA was the only way forward. One solution put forward by Dermot Desmond suggests supporting the banks to resolve their own problems via guarantees. He states: “Nama as conceived will do untold long-term damage to Ireland Inc. It will result in paralysis for decades to come.”

There is the assumption that banks will start lending once bailed out. Anyone following the problems in the UK knows this is simply not true. Governments around the world have used public money to bail out banks only to see many of them quickly return to profit and resume setting aside billions for bonuses (Bloomberg). In relation to bonuses Lord Turner, head of the FSA (UK), said: in many cases the banking industry was socially useless (The Guardian Weekly). In addition, according to Jon Ihle, The Tribune, the banks are bracing themselves for significant post-Nama losses arising as a consequence of Ireland’s ongoing economic deterioration. Thus, the priority of banks will be their own survival and building up their balance sheets via careful investment. Given that Irish banks are also under intense pressure by overseas investors to repay loans, as their reputation is impaired, lending into the economy is a long way off. In addition, the credit agency Moody’s has stated that NAMA will not improve the credit ratings of Irish banks to borrow (Bloomberg). Yet the government has made no arrangements whatsoever to ensure lending takes place. It argues that it has directors on the boards. However, the recapitalisation package only gives it 25% of the voting rights and the government has also stated it does not intend to take control of AIB or BOI.

I firmly believe NAMA is a form of social & economic suicide and defies common sense. It is a continuance of the same economic mindset where it has not been uncommon for state run projects to have cost overruns of the order of 4 with all liability passed on to the tax payer (Dr Sean Barratt, TCD). It comes at a time when the McCarthy report suggests €1m can be saved by closing 350 Garda stations while the original estimate for NAMA & recapitalization is €68.7 thousand million, a large portion of which is going to a bank with very little connection to the real economy. It is myopic to say the least & symbolises all that has been wrong with Ireland’s economic & political system. It replaces natural economic transformation by costly, inefficient, entrenched stagnation where problems are postponed and not solved. Given the enormous impact this will have on the provision of social services for generations, at a time when government is implementing cuts on the most vulnerable in our society for a small fraction of the sums involved, the question has to be asked: who or what does NAMA serve?

Instead of promoting a healthy, accountable, banking system, NAMA props up the old irresponsible culture via the creation of complex and expensive quangos while maintaining an unaccountable banking system which is inherently sick and vulnerable to disaster at the heart of Irish business. Even ardent free marketeers recognize why the markets kill off such entities. Martin Wolf, chief economics commentator at The Financial Times, says regulation of major financial institutions will fail repeatedly as regulators are not well paid and not very motivated and that financial regulation should be similar to the regulation of utilities.

By mortgaging the state to the hilt, the country is also being placed in a perilous position. Should the economy deteriorate further we will be left financially naked having fired all our shots. We may be compelled to borrow vast sums of money for years to come and ultimately may not be able to borrow at all, forcing us to turn to the IMF for help. NAMA is therefore, apart from anything else, an avoidable but clear and present threat to our sovereignty and as such is repugnant to the constitution.

Madam President, 80% of the people have no confidence in this government nor the incoherent arguments being used to bedazzle them long enough to get NAMA enacted – an oasis the Zoe group are clinging to dear life to reach. Yet, the people are powerless to act. Article 45.2.iv of the constitution states: “That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole.” Yet NAMA will squander public funds on a small sector of society while a mortgage timebomb is in the making as interest rates rise, house prices fall, the economy worsens and the government’s 12 month mortgage guarantee comes to an end. After all the billions of untaxed earnings in the hands of a few while social problems grew, must the ordinary tax payer now pay a Celtic Tiger tax and deliver the final blow to the ideal of a just society? If we are to stand by article 45.1 that states: “justice and charity shall inform all the institutions of the national life,” then I humbly suggest Madam President this bill must be referred to the Supreme Court in order to test its constitutionality.

Is mise le meas,

Albert Byrne

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